UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE ACT OF
1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998    Commission file number  0-22085
                                                                      ---------

                                LORAL ORION, INC.
              ----------------------------------------------------
             (Exact name of registrant as specified in its charter)

             Delaware                                   52-2008654
------------------------------------                --------------------
  (State or other jurisdiction of                    (I.R.S. Employer
  incorporation or organization)                    Identification No.)

          2440 Research Boulevard, Suite 400, Rockville, Maryland 20850
          -------------------------------------------------------------
                    (Address of principal executive offices )


                                  301-258-8101
               --------------------------------------------------
              (Registrant's telephone number, including area code)

          Securities registered pursuant to Section 12 (b) of the Act:
          ------------------------------------------------------------
                                      None
                                      ----

          Securities registered pursuant to Section 12 (g) of the Act:
          ------------------------------------------------------------
                          11 1/4% Senior Notes Due 2007
                     12 1/2% Senior Discount Notes Due 2007
                                (Title of Class)
                                ----------------

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. 
Yes X No_
---
                                
Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [Not Applicable]

The number of shares of common stock, par value $.01 per share of the registrant
outstanding  as of March 15, 1999 was 100, all of which were owned,  directly or
indirectly by Loral Space & Communications Ltd.

THE REGISTRANT  MEETS THE  CONDITIONS SET FORTH IN GENERAL  INSTRUCTION I (1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING WITH THE REDUCED  DISCLOSURE FORMAT
PURSUANT TO GENERAL INSTRUCTION I (2) OF FORM 10-K.

                       DOCUMENTS INCORPORATED BY REFERENCE
                       -----------------------------------
                                      None



<PAGE>



                                     PART I

ITEM 1.  BUSINESS.

GENERAL

     Loral  Orion,  Inc.  ("Orion" or the  "Company"),  formerly  known as Orion
Network  Systems,  Inc. prior to its acquisition by Loral Space & Communications
Ltd.   ("Loral")  on  March  20,  1998,  is  a  rapidly   growing   provider  of
satellite-based  communications services, providing Satellite Capacity Services,
including video distribution and other satellite  transmission services and Data
Network Services, including managed data network services, Internet services and
broadband  data  services.   Orion  believes  that  demand  for  satellite-based
communications services will continue to grow due to the expansion of businesses
beyond  the limit of wide  bandwidth  terrestrial  infrastructure,  accelerating
demand for high speed data and broadband multimedia  services,  and for Internet
and intranet services,  especially outside the United States, increased size and
scope  of  television  programming   distribution,   worldwide  deregulation  of
telecommunications markets and continuing technological advancement.  Satellites
are able to provide reliable, high bandwidth services anywhere in their coverage
areas,  and Orion  believes that it is well  positioned to satisfy market demand
for these services.

     Orion commenced  operations of Orion 1, a high power Ku-band satellite with
34 Ku-band  transponders,  in January  1995.  Orion 1  provides  coverage  of 34
European  countries,  most of the United States and parts of Canada,  Mexico and
North Africa. Through arrangements with local ground operators,  Orion currently
has the ability to deliver network services to and among points in most European
countries,  portions of the United States and a limited number of Latin American
countries.  The Orion 1 satellite's  coverage  reaches all locations  within its
footprint,  enabling  the delivery of  high-speed  data to customers in emerging
markets and remote locations which lack the necessary  infrastructure to support
these services.

     Orion 2, which will be a high power satellite with 38 Ku-band  transponders
for  operation  in the  Atlantic  Ocean  Region,  will expand  Orion's  European
coverage  and extend  coverage to portions of the  Commonwealth  of  Independent
States,  Latin  America,  the  Middle  East and South  Africa.  Orion 2 is being
constructed by Space  Systems/Loral,  Inc., a wholly owned subsidiary of Orion's
parent,  Loral Space & Communications Ltd. Orion has established an early market
presence in Latin America in preparation  for the launch of Orion 2 scheduled to
occur in the third quarter of 1999.

     Orion 3, which will be a high power satellite with 33 Ku-band  transponders
and 10 C-band  transponders,  will cover broad areas of the Asia Pacific region,
including China, Japan, Korea, India,  Southeast Asia,  Australia,  New Zealand,
Eastern  Russia and Hawaii.  Orion 3's  footprint  will  provide  Orion with the
ability to provide its services between the United States via Hawaii and most of
the Asia Pacific region.  Orion has also established an early market presence in
Asia,  including  entering into an $89 million  contract with DACOM  Corporation
("DACOM")  for  eight of Orion  3's  transponders.  Orion 3 is  scheduled  to be
launched in April 1999.

     In the aggregate, the footprints of Orion 1, Orion 2 and Orion 3 will cover
over 85 percent of the world's population.

BUSINESS SEGMENTS

Fixed Satellite Services

     Orion provides transmission  capacity to cable and television  programmers,
news and information networks,  telecommunications  companies and other carriers
for a variety of  applications.  A majority  of  Orion's  transmission  capacity
services consist of video services.  The Company  generally offers  transmission
capacity  services  under long term  contracts  and also offers  occasional  use
services for periods of up to a few hundred hours.

Data Services

     Very Small  Aperture  Terminal  ("VSAT")  Services.  Orion's  Digital  Link
service can be designed as a  "point-to-point"  private network service directly
connecting  customer  locations  or  as  a  "point-to-multipoint"   service  for
customers seeking to transmit communications from a central location to numerous
remote  sites.  Dynalink is a service that allows the customer  with  occasional
bandwidth  requirements  to control the  activation  and  deactivation  of links
within a "point-to-point"  or  "point-to-multipoint"  network.  Orion's patented
international data networking service, "Virtual Integrated Sky Network" ("VISN")
is a fully meshed, frame relay-based  satellite network service that dynamically
consolidates  the full  range of voice  and data  applications  through a single
access point.  The service  provides  seamless  connectivity,  not merely from a
central point to up to 254 remote sites, but also among the remote locations.

                                       2
<PAGE>



     Internet  Services.  Orion offers a family of innovative  Internet/intranet
solutions,  responding to international  Internet Service  Providers' (ISPs) and
multinational  corporations' bandwidth and quality of service concerns.  Orion's
WorldCast   (patent   pending)  family  of  services  are  designed  to  provide
cost-effective,   high-performance  connectivity  to  ISPs,  content  providers,
carriers  and  multinational  businesses  needing  access to the North  American
Internet backbone.  WorldCast is a multicast satellite communications technology
that takes  advantage of the broadcast  nature of satellites  and the asymmetric
nature of Internet  traffic.  Worldcast  can be  configured  to provide a hybrid
solution of terrestrial connectivity for small requests sent to the Internet and
a  satellite  connection  for the  larger,  high-bandwidth  files  sent from the
Internet.

ACQUISITION OF THE COMPANY BY LORAL

     On March 20, 1998, Orion was acquired by Loral Space & Communications  Ltd.
("Loral"),  through the merger (the  "Merger") of a wholly owned  subsidiary  of
Loral, Loral Satellite  Corporation,  with and into Orion. Loral consummated the
acquisition  by  issuing  18 million  shares of its  common  stock and  assuming
existing  Orion vested  options and  warrants to purchase 1.4 million  shares of
Loral common stock  representing an aggregate  purchase price of $472.5 million.
Orion  was  the  surviving  corporation  of the  Merger  and  thereby  became  a
subsidiary of Loral. At the effective date of the Merger,  Loral contributed its
investment in Orion to Loral Space & Communications  Corporation, a wholly owned
subsidiary of Loral, and Orion changed its name to "Loral Orion Network Systems,
Inc." The name has since been changed to "Loral Orion, Inc."

     Following  the  Merger,  the capital  stock of Orion  ceased to be publicly
traded.  However, the Company continues to have registered bonds outstanding and
will continue to have filing requirements with the SEC.

     The foregoing description of the Merger does not purport to be complete and
is  qualified  in its  entirety  by  the  terms  and  conditions  of the  Merger
Agreement, filed as Exhibits 2.1 and 2.2 to Registration Statement No.
333-46407 on Form S-4.

AGREEMENTS WITH LORAL SKYNET

     Orion and Loral Skynet, a division of Loral SpaceCom Corporation,  which is
in turn a wholly-owned  subsidiary of Loral,  have entered into  agreements (the
"Loral Skynet  Agreements")  effective on January 1, 1999,  whereby Loral Skynet
provides to Orion (i) marketing and sales of Satellite  Capacity Services on the
Orion  satellite  network and related  billing  and  administration  of customer
contracts for those services (the "Sales Services") and (ii) telemetry, tracking
and control services for the Orion satellite network (the "Technical  Services",
and together with the Sales  Services,  the  "Services").  Orion will be charged
Loral   Skynet's   costs  for  providing   these   services  plus  a  5  percent
administrative  fee.  Loral Skynet  currently  provides the Services for its own
Telstar satellite network and Technical Services for other third parties.  Orion
believes that it will achieve cost savings as a result of the  consolidation  of
the Services with Loral Skynet pursuant to the Loral Skynet Agreements and allow
Orion to place  greater  resources  and focus on its business of providing  Data
Services.



<PAGE>



SUMMARY SATELLITE DATA

     The following table presents a brief description of the Company's  proposed
satellite network. All satellite systems are subject to international  frequency
coordination  requirements  and must  obtain  appropriate  authority  to provide
service in a given territory.

<TABLE>
<CAPTION>
                                             ORION 1                      ORION 2                           ORION 3
                                             -------                      -------                           -------

<S>                                <C>                        <C>                                     <C>    
Region Covered...................   Europe, Southeastern      Eastern U.S., Southeastern Canada        China, Japan, Korea, India,
                                    Canada, U.S., East of the Europe, Commonwealth of Independent      Hawaii, Southeast Asia,
                                    Rockies and parts of      States, Middle East, North Africa, Latin Australia, New Zealand,
                                    Mexico                    America and South Africa                 Eastern Russia and Oceania

Expected Launch..................   Operational(1)            Third quarter of 1999                    April 1999
Satellite Manufacturer...........   MMS Space Systems         Space Systems/Loral                      Hughes Space
                                    (subsidiary of Matra
                                    Marconi Space)
Transponders(2)..................   34                        38                                       43

Ku-Band(3).......................   28@0054 MHz               38@0054 MHz                              23@0054 MHz   
                                    6@0036 MHz                                                         2@0027 MHz    
                                                                                                       8@0036 MHz (4)
                                                                                                                     
C-Band(5)........................              --                   --                                 10@0036 MHz   
                                                                                                                     
Usable Bandwidth(6)..............   1728 MHz                  2052 MHz                                 1944 MHz      
                                                                                                                     
EIRP(7)..........................   47 to 52 dBW              47 to 50 dBW                             44 to 52      
                                                                                                       for Ku-Band;
                                                                                                       34 to 38
                                                                                                       for C-band returns

Total Prime Power(8) ............   4500 Watts                7000 Watts                        8000 Watts

Expected End of Useful Life(9)...   2005                      2012                              2013

Approximate Percentage of World
Population Covered by
Satellite(10)....................   17.9%                     27.0%                             57.0%
</TABLE>


(1)  Orion  1 was  launched  on  November  29,  1994  and  commenced  commercial
     operations on January 20, 1995.

(2)  Satellite  transponders  receive  signals up from earth  stations  and then
     convert,  amplify  and  transmit  the  signals  back  down to  other  earth
     stations.

(3)  Ku-band  frequencies  are  higher  than  C-band  frequencies  and are  used
     worldwide for commercial satellite communications.

(4)  Orion has entered into a contract with DACOM under which Orion will provide
     eight  dedicated  transponders  on  Orion 3 for  direct-to-home  television
     service and other satellite services, provided that Orion 3 is delivered in
     orbit and fully operational by June 30, 1999.

(5)  C-band frequencies minimize  interference from atmospheric  conditions such
     as  rain.  C-band  satellites  share  frequencies  with  terrestrial  based
     microwave  systems and therefore  require more  on-ground  coordination  to
     avoid  interference  problems and generally are lower power,  requiring the
     use of large  earth  stations to receive  signals.  A portion of Orion 3 is
     designed to transmit  over  C-band  frequencies,  since Orion 3 is to cover
     areas of Asia where satellite signals experience  significant  interference
     from rain during several months of the year.

(6)  Bandwidth is a measure of the  transponder  resource  which  determines the
     information carrying capacity.  The actual information carrying capacity of
     a transponder is determined by a combination of the transponder's bandwidth
     and radio-frequency ("RF") power.

(7)  Equivalent  isotropic  radiated power ("EIRP") is a measure of the RF power
     of each transponder. Smaller and less expensive earth terminal antennas can
     be used with higher EIRP transponders.


                                       4
<PAGE>


(8)  Total prime power is the total  amount of power that is required to support
     all of the communications and electronics functions of the satellite.

(9)  The  expected  end of a  satellite's  in-orbit  useful life is based on the
     period during which the  satellite's  on board fuel permits  proper station
     keeping  maneuvers for the satellite.  The information for Orion 1 is based
     on 1998 fuel level  estimates.  The  information for Orion 2 and Orion 3 is
     based on their expected launch dates and their respective  construction and
     launch contracts.

(10) The approximate percentages of world population covered or to be covered by
     the Orion satellites are not additive. In the aggregate,  the footprints of
     the Orion satellites would cover over 85 percent of the world's population.

INSURANCE

     Orion has obtained  satellite  in-orbit  insurance for Orion 1 covering the
period  from  August  1998 to August  2003 in an amount  of  approximately  $195
million  providing  protection  against partial or total loss of the satellite's
communications  capability,  including  loss of  transponders,  power,  fuel, or
ability to control the positioning of the satellite.  Orion is in the process of
obtaining  launch and in-orbit  life  insurance for Orion 2 and Orion 3 covering
the period from launch to five years after  launch in an amount of  $261,404,000
for  Orion  2 and  up to  $265,606,000  for  Orion  3.  This  coverage  provides
protection  against  partial  or total  loss of the  satellite's  communications
capability,  including loss of transponders,  power,  fuel or ability to control
the  positioning  of the  satellite.  Launch  and  in-orbit  insurance  for  its
satellites will not protect the Company against business  interruption,  loss or
delay of revenues and similar losses and may not fully reimburse the Company for
its expenditures.

EMPLOYEES

     As of December  31,  1998,  Orion and its  subsidiaries  had 305  full-time
employees, none of whom are subject to collective bargaining agreements.

                 CERTAIN FACTORS THAT MAY EFFECT FUTURE RESULTS

     This annual report on Form 10-K contains forward-looking  statements within
the  meaning of Section  27A of the  Securities  Act of 1933,  as  amended,  and
Section 21E of the  Securities  Exchange Act of 1934,  as amended.  In addition,
from time to time,  the  Company  or its  representatives  have made or may make
forward-looking   statements,   orally  or  in  writing.   Such  forward-looking
statements may be included in, but are not limited to,  various  filings made by
the Company or Loral with the Securities and Exchange Commission, press releases
or oral  statements  made by or with the  approval  of an  authorized  executive
officer of the Company or Loral.  Actual  results could differ  materially  from
those projected or suggested in any forward-looking  statements as a result of a
wide  variety of factors  and  conditions,  including,  but not  limited to, the
factors summarized below.

LAUNCH FAILURES MAY DELAY SOME OF OUR OPERATIONS IN THE FUTURE.

     Satellite  launches are risky. About 15% of launch attempts end in failure.
We ordinarily insure against launch failures, but at considerable cost. The cost
and the  availability  of insurance vary depending on market  conditions and the
launch   vehicle  used.   Our  insurance   typically  does  not  cover  business
interruption, and so both launch failures and in-orbit satellite failures result
in uninsured losses. Replacement of a lost satellite typically requires up to 18
months  from the time a  contract  is  executed  until  the  launch  date of the
replacement satellite.

     Orion 3 is  currently  scheduled  to be launched on the second  flight of a
Delta 3 rocket in April  1999.  A Delta 3 rocket  failed  in August  1998 on its
maiden flight.  Although the  manufacturer has assured us that the cause of that
failure has been  identified and corrected,  we can't be certain that the second
flight will succeed.

AFTER LAUNCH,  OUR  SATELLITES  REMAIN  VULNERABLE TO IN-ORBIT FAILURE.

     Random failure of satellite components may result in damage to or loss of a
satellite  before the end of its expected life.  Satellites are carefully  built
and tested and have  certain  redundant  systems  in case of  failure.  However,
in-orbit  failure  may result  from the various  causes,  including  they remain
vulnerable to failure and degradation from hazards in space that include:

                                       5

<PAGE>



     o component failure;
     o loss of power or fuel;
     o inability  to  control  positioning  of the  satellite;  
     o solar  and  other astronomical events; and 
     o space debris.

     Repair of  satellites  in space is not  feasible.  Many factors  affect the
useful lives of satellites.  These factors include the quality of  construction,
gradual degradation of solar panels and the durability of components.  Our Orion
2 and Orion 3 are expected to have useful  live of approximately 16 years and 15
years,  respectively.  At December 31, 1998, Orion 1 has a remaining useful life
of 7 years. Although some failures may be covered in part by insurance, they may
result in uninsured losses as well.

     In November  1995,  a component  on Orion 1  malfunctioned,  resulting in a
2-hour  service  interruption.   The  malfunctioning  component  supported  nine
transponders  serving the European portion of Orion 1's footprint.  Full service
was restored using a back-up component. If that back-up component fails, Orion 1
would lose a significant amount of usable capacity.

IMPACT OF A DELAY IN THE LAUNCH OR OPERATIONS OF ORION 3

     DACOM has agreed to buy eight  transponders on Orion 3 for $89 million.  If
Orion 3 is not launched by May 31, 1999, or if the related  transponders are not
ready for  operation by June 30, 1999,  DACOM can terminate  the  agreement.  If
DACOM were to terminate its transponder  agreement with us due to a delay in the
launch or operation  of Orion 3, we will have to refund  amounts  received  from
DACOM ($35.5  million as of December 31,  1998),  we may not have enough cash to
pay our debt.

WE HAVE SUBSTANTIAL DEBT.

     We have  approximately  $933  million  of  outstanding  debt.  Our  debt is
non-recourse to Loral.

     If our business plan does not succeed,  our  operations  might not generate
enough cash to pay our obligations.

     Our business is capital intensive.  We are subject to substantial financial
risks from possible delays or reductions in revenue, unforeseen capital needs or
unforeseen expenses. Our ability to satisfy our obligations will depend upon our
future financial performance which is subject to:

     o the successful execution of our business plan;
     o general economic conditions; and
     o financial,    business,   regulatory   and   other   factors,   including
       international conditions.

These factors are to some extent beyond our control.

THERE ARE RISKS IN CONDUCTING BUSINESS INTERNATIONALLY.

     Much of our business is conducted outside the United States,  which imposes
more  risks.  We could be harmed  financially  and  operationally  by changes in
foreign regulations and telecommunications standards, tariffs or taxes and other
trade barriers.  Customers  outside of the developed world could have difficulty
in obtaining  the U.S.  dollars  they owe us, as a result of exchange  controls.
Additionally, exchange rate fluctuations may adversely affect the ability of our
customers to pay us in U.S. dollars.  Moreover,  if we ever need to pursue legal
remedies against our foreign customers and business partners, we may have to sue
them abroad, where it could be hard for us to enforce our rights.

OUR BUSINESS IS REGULATED, CAUSING UNCERTAINTY AND ADDITIONAL COSTS.

     Our business is regulated by  authorities  in more than 100  jurisdictions,
including the FCC, the International  Telecommunications  Union and the European
Union. As a result,  some of the activities  which are important to our strategy
are beyond our control. The proposed launch and operation of Orion 2 and Orion 3
and our international  service offerings are strategically  important activities
which are regulated by various government and  quasi-government  authorities and
organizations.
                                       6

<PAGE>



     Regulatory authorities in the various jurisdictions in which we operate can
modify,  withdraw or impose  charges or  conditions  upon the licenses  which we
need, and so increase our cost of doing  business.  The regulatory  process also
requires that we negotiate with third parties  operating or intending to operate
satellites at or near orbital  locations  where we place our  satellites so that
the frequencies of the satellites do not interfere.  Because we cannot guarantee
the results of negotiations with third parties,  "frequency  coordination" is an
additional  source of  uncertainty.  We cannot  guarantee  successful  frequency
coordination for our satellites.  In particular,  we have learned that Eutelsat,
which may claim a  priority  filing  with the  International  Telecommunications
Union, has recently placed a satellite that is beyond its useful life at 12.5(0)
W.L,  near the 12(0) W.L.  orbital  location  intended  for Orion 2. If Eutelsat
launches a replacement  satellite  into the 12.5(0) W.L.  orbital  location,  it
would  interfere  with the Orion 2 satellite  at 12(0) W.L. We have entered into
discussions  with  Eutelsat  to resolve  the  issues  relating  to this  orbital
location, however, we cannot guarantee a successful resolution.

     Failure  to  successfully  coordinate  our  satellites'  frequencies  or to
receive other required regulatory approvals could have a material adverse effect
on our financial condition and on our results of operations.

WE HAVE MANY COMPETITORS.

     We  compete  with   well-capitalized   companies.   These   companies  have
considerable  financial  resources,  which  they may use to gain  advantages  in
marketing and in  technological  innovation.  This could have a material adverse
effect on our financial condition and on our results of operations.  Each of our
businesses is subject to intense competition, including from:

          o     several  of the  world's  largest  corporations,  such as Hughes
                Space &  Communications,  Inc., a subsidiary  of General  Motors
                Corporation,  and Lockheed Martin Corporation; 
          o     governments and quasi-government organizations, such as Intelsat
                and Eutelsat;  
          o     companies   with   competitive   services,   such  as   PanAmSat
                Corporation; and
          o     others  using  alternative  technologies,  such  as  terrestrial
                telecommunications  and  cable  television,  who are  constantly
                pursuing  advanced   technologies  in  order  to  enhance  their
                competitive positions.

     We compete for customers  and for market  share.  We also compete for local
regulatory  approval  in places in which  both we and a  competitor  may want to
operate.  We also compete for scarce  frequency  assignments and  geosynchromous
orbital positions.

IMPACT OF YEAR 2000

     The  Company is  evaluating  the  potential  effect of the year 2000 on its
information processing systems. It is not known at this time what modifications,
if any, will be required.  All costs  associated with any  modification  will be
expensed as incurred.

     The Company's  Year 2000 Program is  proceeding on schedule.  The Year 2000
 Issue is the result of computer  programs  which were written  using two digits
 rather than four to signify a year (i.e.,  the year 1999 is denoted as "99" and
 not "1999"). Computer progra ms written using only two digits may recognize the
 year  2000  as the  year  1900.  This  could  result  in a  system  failure  or
 miscalculations causing disruption of operations.

     The Company has  implemented a Year 2000 program (the "Year 2000  Program")
for its internal products,  system and equipment,  as well as for key vendor and
customer  supplied  products,  systems and  equipment.  As part of the Year 2000
Program,  the Company is assessing  the Year 2000  capabilities  of, among other
things, its satellite,  ground equipment,  research and development  activities,
and facility management systems. The Year 2000 Program consists of the following
phases:  Inventory of Year 2000 items,  Assessment  (including  prioritization),
Remediation  (including  modification,  upgrading and replacement),  Testing and
Auditing.  This five-step  program is divided into six major  sections  covering
both information and non-information technology systems: 1) business systems, 2)
technical systems, 3) products and services, 4) imbedded  hardware/firmware,  5)
vendor supplied products and 6) customer provided  products.  As of February 28,
1999, the Company has completed  approximately 95 percent of the inventory phase
and  approximately  95 percent of its assessment  phase.  The Company expects to
complete  the first four  phases,  through the testing  phase,  of the Year 2000
Program  during  the third  quarter of 1999,  which is prior to any  anticipated
material  impact on the  operations of the Company.  The fifth phase,  the audit
phase,  commenced in January 1999, and is expected to continue through the third
quarter of 1999 to accommodate re-audits if necessary.

                                       7
<PAGE>



     Both  internal and  external  resources  are being  utilized to execute the
Company's  plan.  The program to address Year 2000 has been underway  since July
1997. The incremental costs incurred to date for this effort by the Company were
approximately  $50,000. Based on the efforts of the Company to date, the Company
anticipates  additional  incremental expenses of approximately  $165,000 will be
incurred to substantially complete the effort.

     Based upon the  accomplishments  to date, no contingency plans are expected
to be needed.  As risks are identified,  contingency plans will be developed and
implemented as necessary.  However, because of the progress achieved to date and
the  Company's  expectations  that its Year 2000 program  will be  substantially
complete in the third quarter of calendar  1999, the Company  believes  adequate
time will be available to insure  alternatives  can be  developed,  assessed and
implemented  prior to a Year 2000 issue having a material negative impact on the
operations  of the  Company.  However,  there  can  be no  assurance  that  such
modifications and conversions, if required, will be completed on a timely basis.

     The cost of the program and the dates on which the Company believes it will
substantially  complete Year 2000  modifications  are based on management's best
estimates.  Such estimates  were derived using software  surveys and programs to
evaluate  calendar date  exposures and numerous  assumptions  of future  events,
including the continued availability of certain resources, third-party year 2000
readiness and other factors.  Because none of these estimates can be guaranteed,
actual results could differ  materially  and adversely  from those  anticipated.
Specific  factors  that  might  cause an  adjustment  of costs  are:  number  of
personnel  trained in this area,  the ability to locate and correct all relevant
computer  codes,  the ability to  validate  supplier  certification  and similar
uncertainties.

     The  Company's  failure to  remediate a material  Year 2000  problem  could
result in an interruption or failure of certain basic business operations. These
failures  could  materially  and  adversely  effect  the  Company's  results  of
operations, liquidity and financial condition. The Company is also assessing the
Year 2000 readiness of key third-party suppliers. Information requests have been
distributed  to such suppliers and replies are being  evaluated.  If the risk is
deemed  material,  on-site  visits to suppliers  will be conducted to verify the
adequacy of the information received. However, due to the general uncertainty of
the  Year  2000  problem,  including  uncertainty  with  regard  to  third-party
suppliers and customers, the Company is unable to determine at this time whether
the  consequences of Year 2000 failures will have an adverse  material impact on
the Company's results of operations, liquidity or financial condition. There can
be no assurance given that the Company's Year 2000 Program will be successful in
avoiding any interruption or failure of certain basic business operations, which
may have a material  adverse  effect on the  Company's  results of operations or
financial position.

THERE ARE RISKS REGARDING FORWARD-LOOKING STATEMENTS.

     Some  statements  or  information  contained  in  this  Form  10-K  are not
historical facts but are  "forward-looking  statements" (as such term is defined
in the Private Securities Litigation Reform Act of 1995). They can be identified
by the use of  forward-looking  words such as  "believes",  "expects",  "plans",
"may", "will", "should", or "anticipates" or their negatives or other variations
of these words or other  comparable  words,  or by  discussions of strategy that
involve  risks and  uncertainties.  Some of the factors  which may cause  future
results and performance to differ from what we may imply here are:

          o     the space environment,  where our satellites operate, is a harsh
                environment;
          o     governments may change regulations or institute new rules, which
                could have an impact on our operations;
          o     we may not successfully  coordinate  satellite  frequencies with
                third parties;
          o     there is severe competition in our business; and
          o     we owe significant amounts of money.

     We warn you that  forward-looking  statements are only predictions.  Actual
events or  results  may  differ  materially  as a result of risks  that we face,
including those set forth elsewhere in this section. These are representative of
factors that could affect the outcome of the forward-looking statements.

ITEM 2.  PROPERTIES.

     Loral Orion owns seven acres of land in Mt.  Jackson,  Virginia  and leases
approximately  78,000  square feet for office space and its  operations  center.
Management   believes  that  the  facilities  are  sufficient  for  its  current
operations.

                                       8
<PAGE>



ITEM 3.  LEGAL PROCEEDINGS.

     While Orion is party to legal and  regulatory  proceedings  incident to its
business,  there are no material legal proceedings  pending or, to the knowledge
of management, threatened against Orion or its subsidiaries.

ITEM 4.  SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS.

     Omitted pursuant to General Instruction I of Form 10-K.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     All of the  Company's  outstanding  common  stock is owned by Loral Space &
Communications Corporation, a wholly owned subsidiary of Loral. Therefore, there
is no public  trading  market for the Company's  common  stock.  The Company has
never paid dividends on its common stock. Loral Orion's  indentures  relating to
its Senior Notes and Senior Discount Notes include certain restrictions on Loral
Orion's ability to pay dividends or make loans to Loral.

ITEM 6.  SELECTED FINANCIAL DATA.

     Omitted pursuant to General Instruction I of Form 10-K.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

     Except  for  the  historical  information  contained  herein,  the  matters
discussed in this  Management's  Discussion and Analysis of Financial  Condition
and Results of Operations,  and elsewhere in this Form 10-K, are forward-looking
statements  within the meaning of Section 27A of the  Securities Act of 1933, as
amended,  and Section 21E of the Securities Exchange Act of 1934, as amended. In
addition,  from time to time, Loral Orion, Loral or their  representatives  have
made  or  may  make  forward-looking  statements,  orally  or in  writing.  Such
forward-looking  statements  may be included in, but are not limited to, various
filings  made  by  Loral  Orion  or  Loral  with  the  Securities  and  Exchange
Commission, press releases or oral statements made by or with the approval of an
authorized  executive  officer of Loral  Orion or Loral.  Actual  results  could
differ  materially  from those  projected or  suggested  in any  forward-looking
statements as a result of a wide variety of factors or conditions.

GENERAL

     Loral Orion, Inc. (the "Company" or "Loral Orion"), formerly known as Loral
Orion Network  Systems,  Inc., is a holding company with no assets or operations
other than its  investments in its  subsidiaries.  Through the operations of its
subsidiary   Guarantors,   the   Company's   principal   business  is  providing
satellite-based  communications services for private communications networks and
video  distribution and other satellite  transmission  services.  In 1998, Loral
Orion  organized  its business into two distinct  operating  segments as follows
(see Note 8 to the consolidated financial statements):

     Fixed  Satellite  Services:  Leasing  transponder  capacity  and  providing
     value-added  services  to  customers  for a wide  variety of  applications,
     including  the  distribution  of  broadcast  programming,  news  gathering,
     business television, distance learning and direct-to-home ("DTH") services.
     The Company's fixed satellite  services ("FSS") assets,  will be managed by
     Loral Skynet effective January 1, 1999, and

     Data Services:  Business in development,  providing managed  communications
     networks and Internet and intranet services,  using transponder capacity on
     the Loral Skynet Telstar and Loral Orion fleets.

     No  restrictions  exist on the ability of any of the  subsidiaries of Loral
Orion ("Subsidiary Guarantors") other than inconsequential  subsidiaries, to pay
dividends  or make  other  distributions  to the  Company,  except to the extent
provided by law generally  (e.g.,  adequate capital to pay dividends under state
corporate laws).

                                       9
<PAGE>


                                LORAL ORION, INC.

         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
                                   (CONTINUED)

OVERVIEW

     The  Company's  revenues are  principally  generated  from two to five year
contracts  for delivery of  communications  services  derived  principally  from
recurring monthly fees from its customers. The revenues from each contract vary,
depending upon the type of service, amount of capacity, data handling ability of
the  network,  the  number of very small  aperture  terminals  ("VSATs")  (which
generally are owned by the  Company),  value-added  services and other  factors.
Substantially  all of the Company's  contracts are denominated in U.S.  dollars.
The  Company  begins  to  record  revenues  under  its  contracts  upon  service
commencement to customers.

     The services provided by the Company have been subject to decreasing prices
over  recent  years due to  increased  competition.  This  pricing  pressure  is
expected  to  continue  (and  may  accelerate)   for  the  foreseeable   future,
particularly if, as expected,  capacity continues to increase.  The Company will
need to  increase  its  volume of sales in order to  compensate  for such  price
reductions.  The Company believes that customers will increase the data speed in
their  communications  networks  to  support  new  applications,  and that  such
upgrading  of  customer  networks  will  lead to  increased  revenues  that will
mitigate the effect of price reductions. However, there can be no assurance that
this will occur.  The  Company  expects to continue to incur net losses and have
negative cash flow (after  payments for capital  expenditures  and interest) for
the foreseeable future.

     The  Company's  direct  cost of  services  includes  principally  (i) costs
relating to the  installation,  maintenance and licensing of VSAT earth stations
at its  customers'  premises;  (ii)  satellite  lease  payments for  transponder
capacity  (generally  for  services  outside  of the Orion 1  footprint);  (iii)
in-orbit  insurance  premiums;  and (iv)  personnel  costs and travel related to
telemetry,  tracking and control facility ("TT&C"), network monitoring,  network
design and  similar  activities.  Regarding  TT&C  costs,  the Company and Loral
Skynet,  a  division  of  Loral  SpaceCom  Corporation,   which  is  in  turn  a
wholly-owned  subsidiary  of Loral,  have  entered into  agreements  (the "Loral
Skynet Agreements")  effective on January 1, 1999, whereby Loral Skynet provides
to Orion (i)  marketing  and sales of satellite  capacity  services on the Orion
satellite network and related billing and  administration of customer  contracts
for those  services  (the "Sales  Services")  and (ii)  telemetry,  tracking and
control services for the Orion satellite network (the "Technical Services",  and
together with the Sales Services,  the "Services").  Orion will be charged Loral
Skynet's costs for providing these services plus a 5 percent administrative fee.
Loral Skynet  currently  provides  the  Services  for its own Telstar  satellite
network and Technical  Services for other third parties.  Orion believes that it
will achieve cost savings as a result of the  consolidation of the Services with
Loral Skynet  pursuant to the Loral Skynet  Agreements  and allow Orion to place
greater  resources and focus on the business of providing Data  Services,  which
will  increase as the Company's  business  grows.  Sales and marketing  expenses
consist of salaries,  sales  commissions  (including  commissions to third party
sales representatives), travel and promotional expenses. The Company commenced a
significant  expansion of its marketing program in 1997 which continued in 1998.
Due to the complexity of the Company's services,  and the continued expansion of
sales personnel,  sales and marketing  expenses increased  significantly  during
1998. Sales and marketing  expenses are expected to decrease in 1999 as a result
of the Services  agreement  with  Skynet.  General and  administrative  expenses
consist of personnel  costs other than for selling and  engineering  and include
information  systems,  professional  services,  and occupancy costs. These costs
will increase  generally as the Company's  operations  expand.  Depreciation and
amortization  expenses  result  mainly  from  the  depreciation  of the  Orion 1
satellite,  amortization of goodwill and other  intangibles and the depreciation
of VSATs and the  related  equipment  to service  the  expansion  of the private
network communication services business. Interest income is primarily the result
of interest earned on the proceeds from the Company's debt and equity offerings.
Interest costs stem primarily  from the Company's  outstanding  Senior Notes and
Senior Discount Notes.

ORION 2 AND ORION 3

     Orion 2.  During the second  quarter of 1998,  the Company  entered  into a
satellite procurement contract with Space Systems/Loral ("SS/L"), a wholly owned
subsidiary of Loral SpaceCom  Corporation for the construction and launch of the
Orion 2 satellite for operation in the Atlantic Ocean region at 12(degree)  W.L.
(the "SS/L  Contract").  The SS/L Contract provides for delivery in-orbit of the
Orion 2 aboard an Ariane 44L launch  vehicle in the third  quarter of 1999.  The
SS/L  satellite  design  provides for 38 Ku-band  transponders  with a footprint
covering  the  Eastern  United  States,   Southeastern   Canada,   Europe,   the
Commonwealth of Independent  States, the Middle East, North and South Africa and
South America.  The Company also notified Matra Marconi Space  ("Matra") that it
cancelled its satellite procurement contract with Matra for the construction and
launch of a satellite for  operation in the Atlantic  Ocean region at 12(degree)
W.L.  (the  "Matra  Contract").  As a result  of the  cancellation  of the Matra
Contract, the Company will have no obligation to make further payments to Matra,
but Matra retained amounts previously paid by the Company of $49.1 million.

                                       10
<PAGE>


                                LORAL ORION, INC.

         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
                                   (CONTINUED)

     The Company  believes that the Orion 2 satellite  being  procured from SS/L
offers significant  benefits compared to the Matra satellite.  Orion's cash will
be used to fund the SS/L Contract up to an amount that when added to the amounts
previously  paid to Matra,  will not exceed $202 million,  the total amount that
would  otherwise  have  been  due to Matra if the  Matra  Contract  had not been
canceled. Any requirements to SS/L in excess of $202 million for Orion 2 will be
funded  with  additional   equity   contributed   from  Loral.   Moreover,   the
SS/L-designed satellite is both larger and more powerful than the Matra-designed
satellite.  The SS/L  satellite  will have 8  additional  transponders  and will
provide greater  transmitted power to Orion's  customers.  The expected in-orbit
life of the SS/L  satellite is  approximately  16 years compared to 13 years for
the  Matra  satellite.  The SS/L  satellite  is  designed  to  provide  enhanced
transponder  switching  capabilities as compared to the Matra satellite and also
allows for both uplinking and  downlinking of  transmissions  from South Africa,
while the Matra satellite would not have allowed for uplinking.

     Orion 3. The Company  entered into a satellite  contract  with Hughes Space
and Communications  International,  Inc. in 1997 for the construction and launch
of Orion 3. The  contract  provides  for delivery in orbit of Orion 3 for a firm
fixed price of $203 million excluding launch insurance. Orion 3 will cover broad
areas of the Asia Pacific region including China, Japan, Korea,  Southeast Asia,
Australia, New Zealand, Eastern Russia and Hawaii.

     Pre-Construction  Sale of  Transponders on Orion 3. The Company has entered
into  a  contract  with  DACOM  Corporation,  a  Korean  communications  company
("DACOM"), under which DACOM will, subject to certain conditions, purchase eight
dedicated  transponders on Orion 3 for 13 years, in return for approximately $89
million, payable over a period from December 1996 through seven months following
the lease commencement date for the transponders. Payments are subject to refund
if Orion 3 fails to commence  commercial  operation  by June 30,  1999.  Through
December 31, 1998, the Company has received $35.5 million from DACOM,  including
interest earned on the investment of these payments of $1.5 million.

     Satellite Launch and Operation Risk. There can be no assurance that Orion 2
or Orion 3 will be  successfully  launched or operate in  accordance  with their
design.   While  the  Company  intends  to  procure  launch  insurance  for  the
satellites,  a total or partial loss of either satellite will involve delays and
loss of  revenue  which  will  impair  the  Company's  ability  to  service  its
indebtedness  and such insurance will not protect the Company  against  business
interruption,  loss or delay of  revenues  or  similar  losses and may not fully
reimburse the Company for its expenditures.

RESULTS OF OPERATIONS

     On March 20, 1998,  Orion Network Systems,  Inc.  ("Orion") was acquired by
Loral Space & Communications Ltd.  ("Loral"),  through the merger (the "Merger")
of a wholly owned  subsidiary of Loral,  Loral  Satellite  Corporation  ("Merger
Sub"),  with and into Orion.  Loral  consummated  the  acquisition by issuing 18
million  shares of its common stock and assuming  existing  Orion vested options
and warrants to purchase 1.4 million  shares of Loral common stock  representing
an  aggregate  purchase  price  of  $472.5  million.  Orion  was  the  surviving
corporation  (the  "Surviving  Corporation")  of the Merger and thereby became a
wholly owned  subsidiary of Loral.  At the effective  date of the Merger,  Loral
contributed its investment in Orion to Loral Space & Communications Corporation,
a wholly owned  subsidiary of Loral,  and Orion changed its name to "Loral Orion
Network Systems, Inc." The name has since been changed to "Loral Orion, Inc."

     Following  the  Merger,  the  capital  stock of Loral  Orion  ceased  to be
publicly  traded.  However,  the  Company  continued  to have  registered  bonds
outstanding and will continue to have filing requirements with the SEC.

     For accounting purposes,  the Merger was accounted for as of March 31, 1998
using the  purchase  method.  Accordingly,  the  consolidated  balance  sheet at
December 31, 1998 reflects the push-down of the purchase price allocations.  The
purchase price  represented  $447.7 million in excess of Orion's net book value,
which was  primarily  allocated  to costs in excess of net  assets  acquired  of
$619.7  million and a fair value  adjustment  of $153.4  million to increase the
carrying value of Orion's senior notes and senior discount notes.

                                       11
<PAGE>


                                LORAL ORION, INC.

         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
                                   (CONTINUED)

     Acquisition  of  Teleport  Europe  GmbH.  On March 26,  1997,  the  Company
acquired   German-based   Teleport   Europe  GmbH  (a   communications   company
specializing in private satellite  networks for voice and data services),  whose
name was subsequently  changed to Loral Orion-Europe GmbH ("Orion Europe").  The
Company  has  consolidated  the  operations  of Orion  Europe for the year ended
December  31,  1997,  retroactively  to  January  1,  1997.  The  effect of this
consolidation  on operations  prior to acquisition was to increase  consolidated
revenues by  approximately  $4.1 million,  increase total operating  expenses by
approximately $4.0 million and other expenses by approximately $0.7 million. The
preacquisition  loss of Orion Europe of $0.6 million has been  deducted from the
consolidated statement of operations for the year ended December 31, 1997.

     In evaluating financial performance,  management uses revenues and earnings
before interest, taxes, depreciation and amortization ("EBITDA") as a measure of
a segment's  profit or loss.  The  following  discussion  of revenues and EBITDA
reflects  the  results of Loral  Orion's  operating  segments  for the two years
ending December 31, 1998 and 1997, on a pro forma basis.  Also see Note 8 to the
consolidated financial statements for additional information on segment results.

     In order to  provide  an  understanding  of the  Company,  the  results  of
operations  discusses  the  results  for the year ended  December  31,  1998 and
December 31, 1997,  on a pro forma basis.  The  following  pro forma  results of
operations for the years ended December 31, 1998 and 1997 have been presented to
give the  effect as of  January  1, 1997,  of the  Merger  with  Loral,  and the
Exchange,  the Orion Merger,  and the  Financings  (the  "Transactions")  all as
described in Note 1 to the Company's financial statements. The pro forma results
of  operations  does not purport to present the actual  results of operations of
the Company had the  Transactions in fact occurred on January 1, 1997, nor is it
indicative of the results of operations that may be achieved in the future.

     As a result of these Transactions, the pro forma adjustments resulted in an
increase in depreciation and amortization expenses of approximately $3.9 million
and $17.6 million for the years ended December 31, 1998 and 1997,  respectively.
This increase  primarily relates to the step up in the book value of Orion 1 and
increased  amortization  expenses  for cost in  excess  of net  assets  acquired
associated with the Loral Merger. The pro forma results for 1998 include a $12.8
million adjustment to eliminate merger costs. Pro forma interest expense for the
years ended  December 31, 1998 and 1997 was $67.1 million and $77.8  million,  a
decrease of $0.4 million and $6.0 million from historical amounts, respectively.
The decrease in interest  expense is primarily  attributable  to the  additional
capitalized  interest costs  attributable to two satellites under  construction,
amortization  of bond  premium  relating to the fair value  adjustments  and the
elimination of the debentures, as a result of the Loral Merger.

                                       12
<PAGE>


                                LORAL ORION, INC.

         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
                                   (CONTINUED)





OPERATING REVENUES (IN MILLIONS):

<TABLE>
<CAPTION>

                                                                     PRO FORMA
                                                                     YEAR ENDED
                                                    PRO FORMA       DECEMBER 31,
                                                   YEAR ENDED           1997
                                                  DECEMBER 31,      PREDECESSOR
                                                      1998            COMPANY
                                                  ------------     -------------

<S>                                               <C>              <C>          
Fixed satellite services  ................        $        33.1    $        31.3
Data services  ...........................                 50.3             41.4
                                                  ------------     -------------
Operating revenues .......................        $        83.4    $        72.7
                                                  =============    =============





EBITDA (1) (IN  MILLIONS):

                                                                     PRO FORMA
                                                                     YEAR ENDED
                                                      PRO FORMA     DECEMBER 31,
                                                     YEAR ENDED         1997
                                                    DECEMBER 31,    PREDECESSOR
                                                        1998          COMPANY
                                                   -------------    ------------

Fixed satellite services .................        $        27.9    $       26.5
Data services  ...........................                (18.9)          (21.4)
                                                  ------------     -------------
EBITDA....................................        $         9.0    $        5.1
                                                  =============    =============
</TABLE>
------------------------  
(1) Pro forma EBITDA  (which is  equivalent  to operating  income  (loss) before
depreciation and  amortization) is provided because it is used as the measure of
segment  profit  or  loss  and  because  it is a  measure  commonly  used in the
communications   industry  to  analyze  companies  on  the  basis  of  operating
performance,   leverage   and   liquidity   and  is  presented  to  enhance  the
understanding of Loral Orion's operating results.  However, EBITDA should not be
construed  as an  alternative  to net  income  as an  indicator  of a  company's
operating performance,  or cash flow from operations as a measure of a company's
liquidity.  EBITDA may be  calculated  differently  and,  therefore,  may not be
comparable to similarly titled measures reported by other companies.

                                       13




<PAGE>


                                LORAL ORION, INC.

         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS
                                   (CONTINUED)


     Revenue and Backlog.  Pro forma  revenues  for the year ended  December 31,
1998 and 1997 were $83.4 million and $72.7 million, respectively, an increase of
$10.7 million or 15 percent. This increase is primarily  attributable to private
communications  network  services  operations,  which added 159  customer  sites
during 1998.

     At December 31, 1998,  the Company had a contracted  backlog  (representing
future  revenues  under  customer  contracts) of  approximately  $308.5  million
compared to $269.5  million at  December  31,  1997,  an increase of 14 percent.
Revenue from contracted backlog is typically earned over two to five years.

     Direct  Expenses.  Direct expenses on a pro forma basis for 1998 were $26.3
million,  or 32 percent of sales  compared  to $26.5  million,  or 36 percent of
sales for the same period in 1997.  This decrease was primarily  attributable to
reduced  Internet access and terrestrial  link charges during the fourth quarter
of  1998.   These  costs  support  the   Worldcast   Internet   access   product
("Worldcast"),  which provides international internet connectivity through Orion
1.

     Sales and Marketing  Expenses.  Sales and marketing expenses on a pro forma
basis were $25.1  million for the year ended  December 31, 1998,  as compared to
$19.4  million  for the same period in 1997,  an increase of $5.7  million or 29
percent.  This  increase  primarily  relates to  additional  sales  salaries and
commissions,  independent  contractor fees and  advertising  associated with the
growth in the private communications network service business and Worldcast.

     Engineering  and Technical  Services  Expenses.  Engineering  and technical
services expenses on a pro forma basis for the year ended December 31, 1998 were
$8.4 million  compared to $7.8 million for the same period in 1997,  an increase
of $0.6 million or 8 percent.  These  increases  are primarily due to additional
salaries associated with support of Worldcast.

     General Administrative  Expenses.  General and administrative expenses on a
pro forma  basis  were  $14.5  million  for the year ended  December  31,  1998,
compared  to $14.0  million  for the same  period in 1997,  an  increase of $0.5
million or 4 percent.

     Depreciation and Amortization.  Depreciation and amortization  expense on a
pro forma  basis for the  years  ended  December  31,  1998 and 1997 were  $67.8
million  and $65.8  million,  respectively,  an  increase  of $2.0  million or 3
percent. The increase was primarily a result of depreciation of ground equipment
to service the expansion of the private network communication services business.

     Merger Costs.  Merger costs  associated with the acquisition of the Company
by Loral were $12.8  million for the year ended  December 31,  1998,  which were
eliminated in the pro forma adjustments.

     Interest.  Pro forma  interest  income was $14.7 million for the year ended
December 31, 1998,  compared to $24.7  million for the same period in 1997.  The
decrease in interest  income is due to a  reduction  in the balance  held in the
Company's  segregated and restricted funds, which were used for the construction
of satellites and to fund interest  payments on the Company's  senior notes. Pro
forma interest  expense for the years ended December 31, 1998 and 1997 was $67.1
million and $77.8  million,  respectively.  The decrease in interest  expense is
primarily attributable to the additional capitalized interest costs attributable
to two satellites under  construction,  amortization of bond premium relating to
the fair value adjustments and the elimination of the debentures, as a result of
the Loral Merger.

     Income  Taxes.  The Company is included in the  consolidated  U.S.  federal
income tax return of Loral.  Pursuant to a tax sharing  agreement  for 1998 with
Loral,  the Company is entitled to  reimbursement  for the use of its tax losses
when such losses are  utilized by Loral.  For the year ended  December 31, 1998,
the  Company  recorded  a  receivable  under  this  tax  sharing   agreement  of
approximately  $4.9 million and a deferred tax  provision of $3.8  million.  The
deferred tax asset of $53.9  million on the  accompanying  balance  sheet arises
primarily from the tax effect of the temporary  differences between the carrying
amount of the senior notes and the senior  discount  notes payable for financial
and income tax purposes.

     Net Loss. As a result of the above,  the Company's pro forma net losses for
the years  ended  December  31,  1998 and 1997 were  $110.3  million  and $113.7
million, respectively.

                                       14
<PAGE>


                                LORAL ORION, INC.

         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS
                                   (CONTINUED)

RESULTS BY OPERATING SEGMENT

Fixed Satellite Service

     Revenues and EBITDA for the fixed satellite  services  segment  increased 6
percent and 5 percent,  respectively,  in 1998 versus 1997. FSS revenue for 1998
was $33.1  million  versus $31.3  million in 1997.  EBITDA on the same basis was
$27.9  million  in 1998,  or 84  percent  of  revenues,  versus  EBITDA of $26.5
million,  or 85 percent  of  revenues,  in 1997.  Funded  backlog  for the fixed
satellite  services  segment  totaled $164.3 million at the end of 1998,  versus
$163.2 million in backlog at year end 1997.  Capital  expenditures for 1998 were
approximately  $286.9 million.  In 1999,  capital  expenditures  are expected to
decrease due to the expected launches of the Orion 2 and Orion 3 satellites.

     During the fourth quarter of 1998, Loral completed its integration plan for
Loral Orion and  transferred  management  of Loral  Orion's  satellite  capacity
leasing and satellite operations to Loral Skynet,  effective January 1, 1999. In
addition to increasing the operational efficiency, the realignment permits Loral
Orion to focus on and  leverage  its  experience  in the  global  data  services
market.

Data Services

     Revenues for the data  services  segment in 1998 were  approximately  $50.3
million  versus $41.4 million in 1997,  primarily  from Loral Orion's  corporate
data networking and Internet and Intranet services  businesses.  EBITDA for 1998
was a loss of approximately $18.9 million in 1998 versus a loss of $21.4 million
in 1997.  At  December  31,  1998,  funded  backlog  for the  segment was $144.2
million,  at the end of 1998, versus $106.3 at year end 1997, which was all from
external  sources.  Approximately  40 percent of 1998 external funded backlog is
expected to be realized in 1999. Capital expenditures in 1998 were approximately
$15.6 and are estimated to increase in 1999.

OTHER MATTERS

IMPACT OF YEAR 2000

     The  Company is  evaluating  the  potential  effect of the year 2000 on its
information processing systems. It is not known at this time what modifications,
if any, will be required.  All costs  associated with any  modification  will be
expensed as incurred.

     The Company's  Year 2000 Program is  proceeding on schedule.  The Year 2000
Issue is the result of computer  programs  which were  written  using two digits
rather than four to signify a year  (i.e.,  the year 1999 is denoted as "99" and
not "1999").  Computer  programs written using only two digits may recognize the
year  2000  as  the  year  1900.  This  could  result  in a  system  failure  or
miscalculations causing disruption of operations.

     The Company has  implemented a Year 2000 program (the "Year 2000  Program")
for its internal products,  system and equipment,  as well as for key vendor and
customer  supplied  products,  systems and  equipment.  As part of the Year 2000
Program,  the Company is assessing  the Year 2000  capabilities  of, among other
things, its satellite,  ground equipment,  research and development  activities,
and facility management systems. The Year 2000 Program consists of the following
phases:  Inventory of Year 2000 items,  Assessment  (including  prioritization),
Remediation  (including  modification,  upgrading and replacement),  Testing and
Auditing.  This five-step  program is divided into six major  sections  covering
both information and non-information technology systems: 1) business systems, 2)
technical systems, 3) products and services, 4) imbedded  hardware/firmware,  5)
vendor supplied products and 6) customer provided  products.  As of February 28,
1999, the Company completed  approximately 95 percent of the inventory phase and
approximately  95  percent  of its  assessment  phase.  The  Company  expects to
complete  the first four  phases,  through the testing  phase,  of the Year 2000
Program  during  the third  quarter of 1999,  which is prior to any  anticipated
material  impact on the  operations of the Company.  The fifth phase,  the audit
phase,  commenced in January 1999,  and is expected  continue  through the third
quarter of 1999 to accommodate re-audits if necessary.

                                       15
<PAGE>


                                LORAL ORION, INC.

         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS
                                   (CONTINUED)

  
     Both  internal and  external  resources  are being  utilized to execute the
Company's  plan.  The program to address Year 2000 has been underway  since July
1997. The incremental  costs incurred to date for this effort by the Company was
approximately  $50,000. Based on the efforts of the Company to date, the Company
anticipates  additional  incremental expenses of approximately  $165,000 will be
incurred to substantially complete the effort.

     Based upon the  accomplishments  to date, no contingency plans are expected
to be needed.  As risks are identified,  contingency plans will be developed and
implemented as necessary.  However, because of the progress achieved to date and
the  Company's  expectations  that its Year 2000 program  will be  substantially
complete in the third quarter of calendar  1999, the Company  believes  adequate
time will be available to insure  alternatives  can be  developed,  assessed and
implemented  prior to a Year 2000 issue having a material negative impact on the
operations  of the  Company.  However,  there  can  be no  assurance  that  such
modifications and conversions, if required, will be completed on a timely basis.

     The cost of the program and the dates on which the Company believes it will
substantially  complete Year 2000  modifications  are based on management's best
estimates.  Such estimates  were derived using software  surveys and programs to
evaluate  calendar date  exposures and numerous  assumptions  of future  events,
including the continued availability of certain resources, third-party year 2000
readiness and other factors.  Because none of these estimates can be guaranteed,
actual results could differ  materially  and adversely  from those  anticipated.
Specific  factors  that  might  cause an  adjustment  of costs  are:  number  of
personnel  trained in this area,  the ability to locate and correct all relevant
computer  codes,  the ability to  validate  supplier  certification  and similar
uncertainties.

     The  Company's  failure to  remediate a material  Year 2000  problem  could
result in an interruption or failure of certain basic business operations. These
failures  could  materially  and  adversely  effect  the  Company's  results  of
operations, liquidity and financial condition. The Company is also assessing the
Year 2000 readiness of key third-party suppliers. Information requests have been
distributed  to such suppliers and replies are being  evaluated.  If the risk is
deemed  material,  on-site  visits to suppliers  will be conducted to verify the
adequacy of the information received. However, due to the general uncertainty of
the  Year  2000  problem,  including  uncertainty  with  regard  to  third-party
suppliers and customers, the Company is unable to determine at this time whether
the  consequences of Year 2000 failures will have an adverse  material impact on
the  Company's  results of  operations,  liquidity or financial  condition.  The
Company's  Year 2000  Program  is  expected  to have  considerably  reduced  the
Company's  level of  exposure  in  regard  to  third-party  supplier  Year  2000
problems.  There can be no assurance  given that the Company's Year 2000 Program
will be  successful  in avoiding any  interruption  or failure of certain  basic
business  operations,  which may have a material adverse effect on the Company's
results of operations or financial position.

ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement No.
133 Accounting for Derivative  Instruments and Hedging  Activities ("SFAS 133"),
which requires that all derivative  instruments be recorded on the balance sheet
at their fair value.  Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge  transaction and, if it is, the type
of hedge  transaction.  The Company has not yet  determined  the impact that the
adoption  of SFAS 133 will  have on its  earnings  or  financial  position.  The
Company is required to adopt SFAS 133 on January 1, 2000.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest

     As of December 31, 1998, the fair value of the Company's  long-term debt is
estimated  to be $761 million  using quoted  market  prices,  for the  Company's
Senior Notes and Senior  Discount  Notes.  The  long-term  debt  carrying  value
exceeded  fair value by $173  million.  Market risk on debt is  estimated as the
potential  increase in annual interest expense resulting from a hypothetical one
percent increase in the interest rates and amounts to $9 million.

                                       16
<PAGE>



ITEM 8.

INDEPENDENT AUDITORS' REPORT



To the Shareholder of Loral Orion, Inc.:


We have audited the accompanying consolidated balance sheet of Loral Orion, Inc.
and its  subsidiaries  (collectively,  the Successor  Company),  a  wholly-owned
subsidiary of Loral Space & Communications  Corporation, as of December 31, 1998
and the related consolidated statements of operations,  changes in stockholders'
equity and cash flows for the nine months ended  December 31, 1998. We have also
audited the  consolidated  statements of  operations,  changes in  stockholders'
equity  and cash  flows of Orion  Network  Systems,  Inc.  and its  subsidiaries
(collectively,  the  Predecessor  Company)  for the three months ended March 31,
1998.  These financial  statements are the  responsibility  of the Successor and
Predecessor Companies'  management.  Our responsibility is to express an opinion
on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidences supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of Loral
Orion,  Inc. and its  subsidiaries  as of December 31, 1998,  and the results of
their  operations  and their cash flows for the nine months  ended  December 31,
1998 in conformity with generally accepted  accounting  principles.  Further, in
our  opinion,  the  Predecessor  Company's   consolidated  financial  statements
referred to above present fairly, in all material respects, the results of their
operations  and their cash flows for the three  months  ended  March 31, 1998 in
conformity with generally accepted accounting principles.

As discussed in Note 1 to the consolidated  financial statements,  the Successor
Company  adopted a new accounting  basis  effective March 31, 1998 in connection
with a change of  ownership  and  recorded net assets as of that date at the new
owner's acquisition cost. Accordingly, the book values of assets and liabilities
and related depreciation,  amortization and interest charges in the accompanying
consolidated balance sheet as of December 31, 1998 and consolidated statement of
operations  for the nine months ended  December 31, 1998,  are not comparable to
those of earlier periods presented.





DELOITTE & TOUCHE LLP



Washington, DC
February 16, 1999





                                    17

<PAGE>


ITEM 8 (CONTINUED).

                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS




To the Board of Directors of Loral Orion, Inc.  (formerly Orion Network Systems,
Inc.):

     We have audited the accompanying consolidated balance sheet of Loral Orion,
Inc.  (formerly  Orion Network  Systems,  Inc.) as of December 31, 1997, and the
related consolidated  statements of operations,  changes in stockholders' equity
(deficit), and cash flows for each of the two years in the period ended December
31, 1997.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the consolidated  financial position of Loral Orion,
Inc. at December 31, 1997,  and the  consolidated  results of its operations and
its cash flows for each of the two years in the period ended  December 31, 1997,
in conformity with generally accepted accounting principles.



                                             /s/ Ernst & Young LLP



Washington, DC
February 20, 1998




                                       18

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)






<TABLE>
<CAPTION>

                                                                                        DECEMBER 31,
                                                                        --------------------------------------------
                                                                                                         1997
                                                                                                      PREDECESSOR
                                                                              1998                      COMPANY
                                                                        ----------------            ----------------
          
ASSETS

Current assets:                                                          
<S>                                                                      <C>                        <C>           
  Cash and cash equivalents                                              $       35,861             $       70,009
  Restricted assets                                                              50,180                     50,064
  Accounts  receivable (less allowance for doubtful  
     accounts of $1,019 and $734
     at December 31, 1998 and 1997,
     respectively)                                                                15,292                     11,781
  Prepaid expenses and other current assets                                        4,299                      6,846
                                                                          --------------            ---------------
Total current assets                                                             105,632                    138,700

Restricted and segregated assets                                                  22,675                    306,826

Property and equipment, at cost:
  Land                                                                                74                         74
  Satellite and related equipment                                                263,188                    322,159
  Telecommunications equipment                                                    35,630                     40,654
  Furniture and computer equipment                                                 8,693                      8,627
                                                                                 307,585                    371,514
                                                                          --------------            ---------------
  Less accumulated depreciation                                                  (38,706)                   (77,080)
  Satellite construction in progress, including capitalized
    interest of $20,198 and $7,346 at December 31, 1998
     and 1997,                                                                        
    respectively                                                                 331,861                    106,843
                                                                          --------------            ---------------
  Net property and equipment                                                     600,740                    401,277

Due from Loral                                                                     3,619                         --
Deferred financing costs, net                                                         --                     22,510
Cost in excess of net assets acquired associated
  with the Loral merger, net                                                     608,015                         --
Deferred income taxes                                                             53,915                         --
Other assets, net                                                                 22,908                     27,179
                                                                          --------------            ---------------
    Total assets                                                          $    1,417,504            $       896,492
                                                                          ==============            ===============
</TABLE>

                       See notes to consolidated financial statements.



                                       19


<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
                           CONSOLIDATED BALANCE SHEETS
                  (in thousands, except share and par amounts)
                                   (continued)



<TABLE>
<CAPTION>

                                                                                        DECEMBER 31,
                                                                        --------------------------------------------
                                                                                                         1997
                                                                                                      PREDECESSOR
                                                                              1998                      COMPANY
                                                                        ----------------            ----------------


<S>                                                                      <C>                        <C>           
LIABILITIES AND STOCKHOLDERS' EQUITY  (DEFICIT)

Current liabilities:
  Current portion of long-term debt                                      $        1,826             $        6,406
  Accounts payable                                                                2,035                      5,231
  Accrued and other current liabilities                                          16,162                     11,604
  Customer deposits                                                               7,897                      2,801
  Deferred revenue                                                               35,841                      3,320
  Interest payable                                                               22,842                     24,771
                                                                         --------------             --------------
    Total current liabilities                                                    86,603                     54,133

Long-term debt                                                                  931,669                    790,671
Other long-term liabilities                                                         141                     21,803

Series A 8% Cumulative Redeemable Convertible Preferred Stock,
  $.01 par value; 15,000 shares authorized; 0 and 6,933 shares                        
  issued and outstanding at December 31, 1998 and 1997, respectively,
  plus accrued dividends                                                             --
Series B 8% Cumulative  Redeemable  Convertible Preferred Stock, 
  $.01 par value; 5,000 shares authorized; 0 and 2,059 shares issued 
  and outstanding at December 31, 1998 and 1997, respectively, 
  plus accrued dividends                                                             --                      2,467

Series C 6% Cumulative Redeemable Convertible Preferred Stock, 
  $.01 par value; 150,000 shares authorized; 0 and 82,641 shares issued
  and outstanding at December 31, 1998 and 1997,
  respectively, plus accrued dividends and accretion                                 --                     65,654

Commitments and contingencies:
Stockholders' equity (deficit):
  Common stock, $.01 par value; 1,000 and 40,000,000 shares
  authorized;  100 and 15,959,089 outstanding at December 31,
  1998 and 1997, respectively                                                        --                        160
  Capital in excess of par value                                                481,791                    153,294
  Treasury stock, 0 and 269,274 shares at December 31, 1998
    and 1997, respectively                                                           --                        (91)
  Unearned compensation                                                          (3,347)                        --
  Accumulated other comprehensive income (loss)                                     616                       (956)
  Accumulated deficit                                                           (79,969)                  (199,256)
                                                                         --------------             --------------
    Total stockholders' equity (deficit)                                        399,091                    (46,849)
                                                                         --------------             --------------

    Total liabilities and stockholders' equity (deficit)                 $    1,417,504            $       896,492
                                                                         ==============             ==============
</TABLE>

                 See notes to consolidated financial statements.


                                       20

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (in thousands)




<TABLE>
<CAPTION>
                                                                                           PREDECESSOR COMPANY
                                                                         ------------------------------------------------------
                                                       NINE MONTHS         THREE MONTHS           YEARS ENDED DECEMBER 31,
                                                          ENDED                ENDED         ----------------------------------
                                                  DECEMBER 31, 1998      MARCH 31, 1998           1997                1996
                                                   -------------------    ---------------    ---------------   ----------------
<S>                                                <C>                    <C>                <C>               <C>             
Service revenue                                    $            64,608    $        18,790    $        72,741   $         41,847

Operating expenses:
  Direct                                                        19,906              6,406             26,531             15,457
  Sales and marketing                                           19,365              5,790             19,424             11,465
  Engineering and technical services                             6,486              1,898              7,750              5,191
  General and administrative                                    10,834              3,707             13,956              9,139
  Depreciation and amortization                                 51,434             12,483             48,161             36,948
  Merger costs                                                     612             12,145                 --                 --
                                                   -------------------    ---------------    ---------------   ----------------
       Total operating expenses                                108,637             42,429            115,822             78,200
                                                   -------------------    ---------------    ---------------   ----------------
Loss from operations                                           (44,029)           (23,639)           (43,081)           (36,353)

Interest (income)                                               (9,299)            (5,425)           (24,711)            (2,314)
Interest expense                                                46,439             21,190             83,769             27,764
Other (income) expense                                            (167)               287                507                 23
                                                   -------------------    ---------------    ---------------   ----------------
Loss before income taxes, extraordinary loss
on  extinguishment of debt, minority interest and 
preacquisition loss of acquired subsidiary                     (81,002)           (39,691)          (102,646)           (61,826)

Income tax benefit                                               1,033                 --                 --                 --

Extraordinary loss on extinguishment
  of  debt                                                          --                 --            (15,763)                --

Limited Partners' interest in the net loss of
  Orion Atlantic                                                    --                 --             12,043             34,631

Preacquisition loss of acquired subsidiary                          --                 --                626                 --
                                                   -------------------    ---------------    ---------------   ----------------
Net loss                                                       (79,969)           (39,691)          (105,740)           (27,195)

Preferred stock dividend, net of forfeitures                        --             (1,387)             6,034              1,370
                                                   -------------------    ---------------    ---------------   ----------------

Net loss attributable to common stockholders       $           (79,969)   $       (38,304)   $      (111,774)  $        (28,565)
                                                   ===================    ===============    ===============   ================ 
</TABLE>



                 See notes to consolidated financial statements.





<PAGE>



                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                 (in thousands)



<TABLE>
<CAPTION>
                                                            COMMON STOCK                                                    
                                                            --------------    CAPITAL IN                                    
                                                 NUMBER                       EXCESS OF       ACCUMULATED       TREASURY    
                                               OF SHARES     AMOUNT           PAR VALUE         DEFICIT         STOCK 1     
                                               ---------     ------           ---------         -------         -------     
                                                                                                                            
Balance December 31, 1995
<S>                                                <C>       <C>              <C>            <C>               <C>          
  (Predecessor Company)                            11,116    $        111     $    85,486    $     (58,917)    $        --  
  Conversion of preferred stock                        91               1             804               --              --  
  Issuance of stock warrants                           --              --             300               --              --  
  Exercise of stock options and warrants               38              --             342               --              --  
  Preferred stock dividend, net of                     --              --              --           (1,370)             --  
    forfeitures
  1996 net loss                                        --              --              --          (27,195)             --  
                                              ------------  --------------  --------------  ----------------  ------------  
Balance December 31, 1996
  (Predecessor Company)                            11,245             112          86,932          (87,482)             --  
  Issuance of common stock                             11              --             142               --              --  
  Conversion of preferred stock                     3,352              34          38,812               --              --  
  Conversion of debentures                            735               7          10,285               --              --  
  Issuance of common stock for the
    purchase of APSC                                   86               1           1,199               --              --  
  Issuance of common stock for
    interest payments                                 205               2           2,623               --              --  
  Issuance of common stock for preferred              121               1           2,069                                   
    stock dividend payments                                                                             --              --  
  Issuance of warrants relating to  Senior
    Notes and Senior                                   --              --           9,224               --              --  
Discount Notes, net
  Exercise of stock options and warrants              176               2           1,764               --              --  
  Employee stock purchase plan                         28               1             244               --              --  
  Preferred stock dividend and
    accretion, net of forfeitures                      --              --              --           (6,034)             --  
  Purchase of treasury stock                           --              --              --               --             (91) 
  1997 net loss                                        --              --              --         (105,740)             --  
  Other comprehensive loss                             --              --              --               --              --  
  Comprehensive loss                                   --              --              --               --              --  
Balance December 31, 1997
  (Predecessor Company)                            15,959   $         160   $     153,294   $     (199,256)    $       (91) 
                                              ============  ==============  ==============  ================  ============  
</TABLE>

<TABLE>
<CAPTION>
                                                                  ACCUMULATED
                                                                     OTHER             TOTAL
                                                  UNEARNED       COMPREHENSIVE     STOCKHOLDERS'
                                                COMPENSATION     INCOME (LOSS)        EQUITY (DEFICIT)
                                                ------------     -------------     -------------------
                                                                               
Balance December 31, 1995
<S>                                             <C>              <C>               <C>          
  (Predecessor Company)                         $          --    $          --     $      26,680
  Conversion of preferred stock                            --               --               805
  Issuance of stock warrants                               --               --               300
  Exercise of stock options and warrants                   --               --               342
  Preferred stock dividend, net of                         --               --            (1,370)
    forfeitures
  1996 net loss                                            --               --           (27,195)
                                                --------------   --------------    --------------
Balance December 31, 1996
  (Predecessor Company)                                    --               --              (438)
  Issuance of common stock                                 --               --               142
  Conversion of preferred stock                            --               --            38,846
  Conversion of debentures                                 --               --            10,292
  Issuance of common stock for the
    purchase of APSC                                       --               --             1,200
  Issuance of common stock for
    interest payments                                      --               --             2,625
  Issuance of common stock for preferred                                                   2,070
    stock dividend payments                                --               --
  Issuance of warrants relating to  Senior
    Notes and Senior                                       --               --             9,224
Discount Notes, net
  Exercise of stock options and warrants                   --               --             1,766
  Employee stock purchase plan                             --               --               245
  Preferred stock dividend and
    accretion, net of forfeitures                          --               --            (6,034)
  Purchase of treasury stock                               --               --               (91)
  1997 net loss                                            --               --
  Other comprehensive loss                                 --             (956)
  Comprehensive loss                                       --               --          (106,696)
Balance December 31, 1997
  (Predecessor Company)                         $          --    $        (956)   $      (46,849)
                                               ===============   ==============   ===============
</TABLE>

    See notes to consolidated financial statements. (continued on next page)

                                       22
<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                   (continued)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                             COMMON STOCK                                                  
                                                            --------------    CAPITAL IN                                   
                                                 NUMBER                       EXCESS OF       ACCUMULATED        TREASURY  
                                               OF SHARES     AMOUNT            PAR VALUE         DEFICIT         STOCK (1) 
                                               ---------     ------            ---------         -------         --------- 
                                                                                                                 
<S>                                            <C>         <C>             <C>             <C>               <C>           
Balance December 31, 1997                                                                                                  
  (Predecessor Company)                            15,959   $          160  $     153,294   $      (199,256)  $        (91)
  Issuance of common stock                             14               --            246                --             -- 
  Conversion of preferred stock                     5,739               57         69,831                --             -- 
  Conversion of debentures                          3,572               36         49,964                --             -- 
  Issuance of common stock for interest
    payments                                          184                2          2,577                --             -- 
  Issuance of common stock for
    preferred stock dividend payments                 316                3          5,455                --             -- 
  Exercise of stock options and warrants              165                2          1,638                --             -- 
  Employee stock purchase plan                         20               --            292                --             -- 
  Preferred stock dividends and
   accretion, net of forfeiture                        --               --             --             1,387             -- 
  Recapitalization related to purchase by         (25,969)            (260)       195,215           237,560             91 
    Loral
  Increase purchase price                              --              --            3,491               --             -- 
  Net loss for the three months ended
    March 31, 1998                                     --               --                          (39,691)            -- 
  Other comprehensive loss                             --               --             --                --             -- 
  Comprehensive Loss                                                                                                       
                                             ------------    ------------   --------------  ---------------   ------------ 
Balance March 31, 1998                                 --   $           --  $     482,003   $            --   $         -- 
                                             ============    ============   ==============  ===============   ============ 
  Amortization of unearned compensation                --               --             --                --             -- 
  Stock option forfeitures                             --               --           (212)               --             -- 
  Net loss for the nine months ended                                   
    December 31, 1998                                  --              --               --          (79,969)            -- 
  Other comprehensive income                           --              --              --                --             -- 
  Comprehensive loss                                   --              --               --               --             -- 
                                             ------------    ------------   --------------  ---------------   ------------ 
Balance December 31, 1998                              --    $         --   $      481,791  $       (79,969)  $         -- 
                                             ============    ============   ==============  ===============   ============ 
</TABLE>

<TABLE>
<CAPTION>
                                                                ACCUMULATED
                                                                    OTHER             TOTAL
                                                 UNEARNED      COMPREHENSIVE     STOCKHOLDERS'
                                               COMPENSATION     INCOME (LOSS)    EQUITY (DEFICIT)
                                               ------------     -------------    ----------------
                                           
<S>                                         <C>              <C>               <C>            
Balance December 31, 1997                                      
  (Predecessor Company)                    ) $            --  $          (956)  $      (46,849)
  Issuance of common stock                                --               --              246
  Conversion of preferred stock                           --               --           69,888
  Conversion of debentures                                --               --           50,000
  Issuance of common stock for interest
    payments                                              --               --            2,579
  Issuance of common stock for
    preferred stock dividend payments                     --               --            5,458
  Exercise of stock options and warrants                  --               --            1,640
  Employee stock purchase plan                            --               --              292
  Preferred stock dividends and
   accretion, net of forfeiture                           --               --            1,387
  Recapitalization related to purchase by             (4,512)           1,473          429,567
    Loral
  Increase purchase price                                 --               --            3,491
  Net loss for the three months ended
    March 31, 1998                                        --               --
  Other comprehensive loss                                --             (517)
  Comprehensive Loss                                                                   (40,208)
                                             ---------------  ---------------   -------------- 
Balance March 31, 1998                       $        (4,512) $            --   $      477,491
                                             ===============  ===============   ============== 
  Amortization of unearned compensation                  953               --              953
  Stock option forfeitures                               212               --               --
  Net loss for the nine months ended       
    December 31, 1998                                     --               --
  Other comprehensive income                              --              616
  Comprehensive loss                                      --               --          (79,353)
                                             ---------------  ---------------   -------------- 
Balance December 31, 1998                    $        (3,347) $           616   $      399,091
                                             ===============  ===============   ============== 
</TABLE>


--------
   
(1) Includes  269,274  treasury  shares of which 259,515 were carried at no cost
through March 31, 1998.




                 See notes to consolidated financial statements.

                                       23

<PAGE>
                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                                PREDECESSOR COMPANY
                                                                              -----------------------------------------------------
                                                              NINE MONTHS    THREE MONTHS            YEARS ENDED DECEMBER 31,
                                                              -----------     -----------            ------------------------
                                                                 ENDED            ENDED
                                                              DECEMBER 31,      MARCH 31,
                                                                  1998             1998             1997             1996
                                                            ----------------  ---------------  ---------------  ----------------
OPERATING ACTIVITIES:                                                                                    
<S>                                                          <C>              <C>              <C>              <C>             
Net loss                                                     $      (79,969)  $      (39,691)  $      (105,740) $       (27,195)
Adjustments to reconcile  net loss to net cash  
  provided by (used in)  operating activities:
  Extraordinary loss on extinguishment of debt                           --               --            15,763               --
  Amortization of deferred taxes                                      3,771               --                --               --
  Depreciation and amortization                                      51,434           12,483            48,161           36,948
  Amortization of deferred financing costs                               --              609             2,410            2,131
  Provision for bad debts                                             1,325              150             1,022              919
  Non-cash interest expense                                          24,606           11,048            34,347            2,371
  Interest earned on restricted assets                               (6,896)          (4,629)          (18,203)              --
  Other                                                                (291)           1,644                --              (55)
  Limited Partners' interest in net loss of Orion Atlantic               --               --           (12,043)         (34,631)
  Changes in operating assets and liabilities:
     Accounts receivable                                             (3,578)          (1,408)           (2,923)          (2,203)
     Prepaid expenses and other current assets                         (502)             693            (2,277)            (286)
     Other assets                                                    (1,352)             201            (3,640)             (69)
     Accounts payable, accrued liabilities and other
       current liabilities                                           (1,367)          (2,186)           (2,393)          (3,163)
     Interest payable                                                12,403          (12,510)           16,180              579
     Customer deposits                                                5,071               23             1,612              177
     Deferred revenue                                                10,768              297            11,935           12,562
     Due from Loral                                                  (3,619)              --                --               --
                                                             --------------   --------------   ---------------  ---------------
Net cash provided by (used in) operating activities                  11,804          (33,276)          (15,789)         (11,915)
Investing activities:
Increase in restricted and segregated assets                        (12,000)              --          (419,187)         (10,000)
Uses of and transfers from restricted and segregated                273,960           35,938            90,500               --
assets
Satellite construction costs                                       (270,429)         (14,575)         (102,282)          (3,750)
Capital expenditures                                                (13,667)          (3,805)          (11,062)         (12,625)
Purchase of Teleport Europe GmbH, net of cash acquired                   --               --            (8,375)              --
Other                                                                    --               --                --              (38)
                                                             --------------   --------------   ---------------  ---------------
Net cash provided by (used in) investing activities                 (22,136)          17,558          (450,406)         (26,413)

Financing activities:
Limited Partners' capital contributions                                  --               --                --           30,135
Debt and equity financing costs                                          --               --           (26,122)          (2,265)
Proceeds from issuance of common stock, net of
  issuance costs                                                         --            2,117             2,153              343
Treasury stock purchase                                                  --               --               (91)              --
Proceeds from issuance of debt                                           --               --           770,397               --
Repayment of senior notes and notes payable                          (2,815)            (254)         (216,723)         (27,802)
Swap termination fee                                                     --               --            (5,288)              --
Payment of satellite incentives                                      (5,861)          (1,302)          (18,621)              --
Other                                                                 1,068           (1,051)           (1,689)          14,993
                                                             --------------   --------------   ---------------  ---------------
Net cash provided by (used in) financing activities                  (7,608)            (490)          504,016           15,404
                                                             --------------   --------------   ---------------  ---------------
Net increase (decrease) in cash and cash equivalents                (17,940)         (16,208)           37,821          (22,924)
Cash and cash equivalents at beginning of period                     53,801           70,009            32,188           55,112
                                                             --------------   --------------   ---------------  ---------------
Cash and cash equivalents at end of period                   $       35,861   $       53,801   $        70,009  $        32,188
                                                             ==============   ==============   ===============  ===============
</TABLE>

                 See notes to consolidated financial statements.

                                       24

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands unless otherwise indicated)

1.   ORGANIZATION AND BUSINESS

     Loral Orion, Inc. (the "Company" or "Loral Orion"), formerly known as Loral
Orion Network  Systems,  Inc., is a holding company with no assets or operations
other than its  investments in its  subsidiaries.  Through the operations of its
subsidiary   Guarantors,   the   Company's   principal   business  is  providing
satellite-based  communications services for private communications networks and
video  distribution and other satellite  transmission  services.  In 1998, Loral
Orion  organized  its business into two distinct  operating  segments as follows
(see Note 8):

       Fixed  Satellite  Services:  Leasing  transponder  capacity and providing
       value-added  services to customers  for a wide  variety of  applications,
       including the  distribution  of broadcast  programming,  news  gathering,
       business  television,   distance  learning  and  direct-to-home   ("DTH")
       services.  The Company's fixed satellite services ("FSS") assets, will be
       managed by Loral Skynet effective January 1, 1999, and

       Data Services: Business in development,  providing managed communications
       networks and Internet and intranet services,  using transponder  capacity
       on the Loral Skynet Telstar and Loral Orion fleets.

ACQUISITION OF THE COMPANY BY LORAL

     On March 20, 1998, Orion Network Systems, Inc. ("Orion" or the "Predecessor
Company") was acquired by Loral Space & Communications Ltd.  ("Loral"),  through
the merger (the "Merger") of a wholly owned subsidiary of Loral, Loral Satellite
Corporation   ("Merger  Sub"),  with  and  into  Orion.  Loral  consummated  the
acquisition  by  issuing  18 million  shares of its  common  stock and  assuming
existing  Orion vested  options and  warrants to purchase 1.4 million  shares of
Loral common stock  representing an aggregate  purchase price of $472.5 million.
Orion was the surviving corporation (the "Surviving  Corporation") of the Merger
and thereby  became a subsidiary of Loral.  At the effective date of the Merger,
Loral  contributed  its  investment  in Orion to  Loral  Space &  Communications
Corporation,  a wholly owned  subsidiary of Loral, and Orion changed its name to
"Loral Orion  Network  Systems,  Inc." The name has since been changed to "Loral
Orion, Inc."

     The consolidated  financial statements for the three months ended March 31,
1998  and as of and for  the  two  years  ended  December  31,  1997  and  1996,
respectively,  reflect the results of operations of the Predecessor Company. The
consolidated  financial  statements as of and for the nine months ended December
31, 1998  reflect the results of  operations  of Loral  Orion,  Inc.  Hereafter,
references to the "Company"  include both Loral Orion,  Inc and its predecessor,
Orion Network Systems, Inc.

     Following  the  Merger,  the  capital  stock of Loral  Orion  ceased  to be
publicly  traded.  However,  the  Company  continues  to have  registered  bonds
outstanding.

     For accounting purposes, the Merger was accounted for as of March 31, 1998,
using the  purchase  method.  Accordingly,  the  consolidated  balance  sheet at
December 31, 1998 reflects the push-down of the purchase  price  allocations  to
the assets and  liabilities.  The purchase price  represented  $447.7 million in
excess of Orion's  net book value,  which was  primarily  allocated  to costs in
excess of net assets acquired of $619.7 million,  and a fair value adjustment of
$153.4 million to increase the carrying value of Orion's senior notes and senior
discount notes. In addition,  Loral agreed to assume Orion's  unvested  employee
stock  options,  which  resulted  in a new  measurement  date  and  an  unearned
compensation  charge of $4.3 million, to be amortized over the vesting period of
the options.

     Had the  acquisition  of the  Company  occurred  on January  1,  1997,  the
unaudited  pro forma  sales,  operating  loss and net loss for the  years  ended
December  31,  1998 and 1997 would have been $83.4  million  and $72.7  million;
$58.8  million  and $60.7  million;  and  $110.3  million  and  $113.7  million,
respectively.  These  results,  which are based on various  assumptions  are not
necessarily  indicative  of what would have  occurred had the  acquisition  been
consummated on January 1, 1997.



                                       25

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

1.  ORGANIZATION AND BUSINESS - (CONTINUED)

LORAL ORION SUBSIDIARIES

     All  subsidiaries  of Loral  Orion  ("Subsidiary  Guarantors"),  other than
inconsequential  subsidiaries,  have  unconditionally  guaranteed  the Notes (as
defined  below) on a joint  and  several  basis.  No  restrictions  exist on the
ability of Subsidiary Guarantors to pay dividends or make other distributions to
Loral Orion,  except to the extent  provided by law  generally  (e.g.,  adequate
capital to pay dividends under state corporate laws).

<TABLE>
<CAPTION>
                                                                            Jurisdiction of Organization
                        Subsidiary Name                                           or Incorporation
---------------------------------------------------------------             ----------------------------
<S>                                                                                <C>
Asia Pacific Space and Communications, Ltd.                                          Delaware
(merged with Loral Orion-Asia Pacific, Inc.)

International Private Satellite Partners, L.P.                                       Delaware
(doing business as Orion Atlantic, L.P.)
(merged with Loral Orion Services, Inc.)

Loral Global Services, Inc.                                                          Delaware

Loral Orion-Americas, Inc.                                                           Delaware

Loral Orion-Asia Pacific, Inc.                                                       Delaware
(formerly known as Orion Asia Pacific Corporation)

Loral Orion-Europe, Inc.                                                             Delaware
(formerly known as Orion Atlantic Europe, Inc.)

Loral Orion Global Services, Inc.                                                    Delaware

Orion Oldco Services, Inc.                                                           Delaware
(formerly known as Orion Network Systems, Inc.)

OrionNet Finance Corporation                                                         Delaware

OrionNet, Inc.                                                                       Delaware

Loral Orion Services, Inc.                                                           Delaware
(formerly known as Orion Satellite Corporation)

Loral Orion-Europe GmbH                                                  Federal Republic of Germany
(formerly known as Teleport Europe GmbH)
</TABLE>

     Each of the  Subsidiary  Guarantors  is a wholly  owned  subsidiary  of the
Company.  The  Subsidiary  Guarantors  comprise  all of the direct and  indirect
subsidiaries of the Company (other than inconsequential subsidiaries).  Separate
financial  statements  of the  Subsidiary  Guarantors  are  not  required  to be
presented.

ACQUISITION OF ORION ATLANTIC LIMITED PARTNERSHIP INTERESTS IN THE EXCHANGE

     Through  January 31,  1997,  Orion  Satellite  Corporation  (whose name was
previously  changed to Loral Orion Services,  Inc.) was the sole general partner
in Orion Atlantic L.P. ("Orion  Atlantic") and Loral Orion had a combined 41 2/3
percent equity interest in Orion Atlantic.  As a result of Loral Orion's control
of Orion Atlantic,  Loral Orion's consolidated  financial statements include the
accounts of Orion Atlantic.  All of Orion  Atlantic's  revenues and expenses are
included in Loral Orion's consolidated  financial  statements,  with appropriate
adjustment to reflect the interests of the Limited  Partners in Orion Atlantic's
losses prior to the Exchange as described  below.  Loral Orion  acquired all the
remaining interests in Orion Atlantic

                                       26
<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

1.  ORGANIZATION AND BUSINESS - (CONTINUED)

on January 31,  1997  during the  Exchange as  described  below.  Loral  Orion's
consolidated  financial  statements  also  include  the  accounts  of all  other
subsidiaries of Loral Orion.

     On January 31, 1997,  the Company  acquired all of the limited  partnership
interests  which  it did  not  already  own in the  Company's  former  operating
subsidiary, Orion Atlantic, that owned the Orion 1 satellite prior to its merger
with Loral Orion Services,  Inc.  Specifically,  the Company  acquired the Orion
Atlantic limited partnership interests and other rights relating thereto held by
British  Aerospace  Communications,   Inc.,  COM  DEV  Satellite  Communications
Limited,   Kingston  Communications   International  Limited,   Lockheed  Martin
Commercial  Launch  Services,  Inc.,  MCN Sat US,  Inc.,  an  affiliate of Matra
Hachette, and Trans-Atlantic Satellite,  Inc., an affiliate of Nissho Iwai Corp.
(collectively,  the  "Exchanging  Partners").  The  Company  accounted  for this
transaction  as  an  acquisition  of  minority   interest,   and  as  a  result,
approximately  $34.3  million was allocated to the cost of the Orion 1 satellite
and related equipment.

     Pursuant to a Section 351 Exchange  Agreement and Plan of  Conversion  (the
"Exchange  Agreement"),  the Exchanging  Partners exchanged their Orion Atlantic
limited partnership interests for 123,172 shares of a newly created class of the
Company's Series C Preferred Stock (the  "Exchange").  In addition,  the Company
acquired  certain rights held by certain of the  Exchanging  Partners to receive
repayment  of  various  advances  (aggregating  approximately  $41.6  million at
January 31, 1997. The 123,172  shares of Series C Preferred  Stock issued in the
Exchange were convertible  into  approximately 7 million shares of the Company's
common stock.  As a result of the Exchange,  certain of the Exchanging  Partners
became  principal  stockholders  of the  Company.  The  exchange is described in
greater  detail under the caption "The  Merger,  the Exchange and the  Debenture
Investments" in the Company's  Registration  Statement on Form S-4 (Registration
No. 333-19795).

     The Exchange  and the  acquisition  by the Company of the only  outstanding
minority   interest  in  the  Company's   subsidiary   Asia  Pacific  Space  and
Communications,  Ltd.  from British  Aerospace  Satellite  Investments,  Inc. on
January 8, 1997 (in exchange for  approximately  86,000  shares of the Company's
common stock)  resulted in the Company  owning 100 percent of Orion Atlantic and
its  other  significant   subsidiaries  and,  therefore,  a  greatly  simplified
corporate structure.

THE ORION MERGER

     The Exchange was conducted on a tax-free  basis by means of an Orion Merger
(defined  below)  that was  consummated  on January  31,  1997.  Pursuant to the
Exchange Agreement,  Orion Oldco Services, Inc., formerly known as Orion Network
Systems,  Inc. ("Old Orion"),  formed the Company as a new Delaware  corporation
with a certificate of incorporation,  bylaws and capital structure substantially
identical in all material respects with those of Old Orion. Also pursuant to the
Exchange Agreement, the Company formed a wholly-owned  subsidiary,  Orion Merger
Company, Inc. ("Orion Merger Subsidiary").  Pursuant to an Agreement and Plan of
Merger,  Orion  Merger  Subsidiary  was merged with and into Old Orion,  and Old
Orion became a wholly-owned  subsidiary of the Company (the "Orion Merger").  On
January  31,  1997,  the  effective  time  of  the  Orion  Merger,  all  of  the
stockholders  of Old Orion  received  stock in the  Company  with  substantially
identical rights to the Old Orion stock they held prior to the effective time of
the Orion Merger.  Following the Orion Merger, the Company changed its name from
Orion Newco  Services,  Inc. to Orion  Network  Systems,  Inc. and the Company's
wholly-owned  subsidiary Orion Network  Systems,  Inc. changed its name to Orion
Oldco  Services,  Inc. The  Exchange  and Orion Merger are  described in greater
detail under the caption "The Merger, the Exchange and Debenture Investments" in
the Company's Registration Statement on Form S-4 (Registration No. 333-19795).

FINANCINGS

     On January 31, 1997,  the Company  completed a $710  million bond  offering
(the "Bond  Offering")  comprised of  approximately  $445 million of Senior Note
Units,  each of which  consists  of one 11.25  percent  Senior  Note due 2007 (a
"Senior  Note") and one Warrant to purchase  0.8463 shares of common stock,  par
value $.01 per share ("Common  Stock") of the Company (a "Senior Note Warrant"),
and  approximately  $265.4 million of Senior Discount Note Units,  each of which
consists of one 12.5 percent Senior  Discount Note due 2007 (a "Senior  Discount
Note," and  together  with the Senior  Notes,  the  "Notes")  and one Warrant to
purchase  0.6628 shares of Common Stock of the Company (a "Senior  Discount Note
Warrant,  and together with Senior Note Warrants,  the "Warrants").  Interest on
the Senior Notes will be payable semi-annually in cash on January 15 and July 15
of each year,  with the first payment made on July 15, 1997. The Senior Discount
Notes  will not pay cash  interest  prior to July  15,  2002.  Thereafter,  cash
interest  will accrue until  maturity at an annual rate of 12.5 percent  payable
semi-annually on January 15 and July 15 of each year,  commencing July 15, 2002.
The exercise price


                                       27
<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

1.  ORGANIZATION AND BUSINESS - (CONTINUED)

for the  Warrants  will be $.01 per share of common  stock.  There were  697,400
Warrants issued in connection with the Notes (see Note 6).

     In addition,  on January 31, 1997,  the Company also  completed the sale of
$60 million of its convertible junior subordinated debentures (the "Debentures")
to two investors,  British Aerospace  Holdings,  Inc. ("British  Aerospace") and
Matra  Marconi  Space UK Limited  ("Matra  Marconi  Space").  British  Aerospace
purchased $50 million of the  Debentures  and Matra Marconi Space  purchased $10
million of the Debentures (collectively, the "Debentures Offering", and together
with the Bond Offering,  the "Financings").  The Convertible  Debentures were to
mature in 2012,  and bore  interest at a rate of 8.75 percent per annum  payable
semi-annually in arrears solely in Common Stock of the Company.  The Convertible
Debentures were subordinated to all other indebtedness of the Company, including
the  Notes.  Prior  to the  acquisition  of the  Company  by  Loral,  all of the
debentures had been converted to common stock.

     The net proceeds of the Bond Offering and Debentures  Offering were used by
the Company to repay the Orion 1 credit facility, pre-fund the first three years
of  interest  payments  on certain  of the Notes,  and will be used to build and
launch two additional satellites, Orion 2 and Orion 3.

     The  extraordinary  loss on extinguishment of debt of $15.8 million in 1997
was the result of expensing unamortized deferred financing costs associated with
the Orion 1 credit facility which was refinanced with the proceeds from the Bond
Offering and termination of a interest rate cap agreement.

ACQUISITION OF TELEPORT EUROPE GMBH

     On March 26, 1997, the Company acquired  German-based  Teleport Europe GmbH
(now known as Loral  Orion-Europe  GmbH) ("Loral Orion Europe") a communications
company  specializing in private satellite networks for voice and data services.
The  Company  purchased  the  shares of Loral  Orion  Europe  held by the German
companies,  Vebacom  GmbH  and RWE  Telliance  AG,  now  known  as  o.tel.o  for
approximately $9 million. In addition, the Company acquired Loral Orion Europe's
licenses and operating  agreements to provide  satellite  network services in 40
countries,  including  17  countries  in which the  Company  previously  did not
provide service. The net purchase price of Orion Europe was $8.4 million and was
allocated as follows:

<TABLE>
<CAPTION>
                                                        (in thousands)
<S>                                                     <C>         
Working capital deficit, net of cash acquired....       $      (683)
Property and equipment ...........................            9,346
Other, net ......................................              (288)
                                                        -----------
                                                        $     8,375
                                                        ===========
</TABLE>

The pro forma effect on net loss assuming the acquisition  took place January 1,
1997 was not material.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION POLICY

     The  consolidated  financial  statements for the nine months ended December
31, 1998,  for the three  months  ended March 31,  1998,  and for the year ended
December 31, 1997,  include the accounts of Loral Orion,  Inc., its wholly-owned
subsidiaries and Orion Financial Partnership (OFP), in which Loral Orion holds a
50 percent interest.  The consolidated  financial  statements for the year ended
December  31,  1996,  include  the  accounts  of  Orion,  its  two  wholly-owned
subsidiaries  OrionNet,  Inc.  (OrionNet) and Orion Network Services,  Inc., its
former 83 percent owned subsidiary,  Asia Pacific Space and Communications  Ltd.
(Asia Pacific),  the OFP, in which Orion holds a 50 percent interest,  and Orion
Atlantic, in which Orion held a 41 2/3 percent ownership interest. Orion Network
Services,  Inc. as the general partner of Orion Atlantic,  exercised  control of
Orion  Atlantic  through  the  provisions  of  the  partnership  agreement.  All
significant  intercompany  accounts and transactions  have been  eliminated.  In
January 1997, all of the outside interest in these entities,  except for outside
interests of OFP, were acquired.

                                       28
<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  - (CONTINUED)

CASH AND CASH EQUIVALENTS

     Orion considers all highly liquid investments  purchased with a maturity of
three months or less to be cash equivalents.  Cash and cash equivalents includes
(in thousands):

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                     --------------------------
                                                                       1997
                                                                     PREDECESSOR
                                                         1998         COMPANY
                                                     -----------  --------------
<S>                                             <C>               <C>           
                   Cash ..................      $        3,919    $        2,256
                   Money market funds ....               4,985             2,544
                   Commercial paper ......              26,957            65,209
                                                --------------    --------------
                                                $       35,861    $       70,009
                                                ==============    ==============
</TABLE>

RESTRICTED AND SEGREGATED ASSETS

     Restricted and segregated assets are classified as held to maturity and are
recorded at cost and consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                     --------------------------
                                                                       1997
                                                                     PREDECESSOR
                                                         1998         COMPANY
                                                     -----------  --------------
<S>                                             <C>               <C>           
U.S. treasury notes ....................       $       72,855    $      117,800
Commercial paper .......................                   --           216,697
Time deposits...........................                   --            22,393
Total restricted and segregated assets .               72,855           356,890
Less current portion ...................              (50,180)          (50,064)
                                               --------------    --------------
Long-term portion ......................       $       22,675    $      306,826
                                               ==============    ===============
</TABLE>

     Included  in  restricted  and  segregated  assets is $2.1  million and $3.7
million of accrued  interest at December  31, 1998 and 1997,  respectively.  The
balance at December 31, 1998 is restricted for use for interest  payments on the
Senior Notes through January 2000. The U.S.  treasury notes held at December 31,
1998 mature between January 1999 and January 2000.

CONCENTRATION OF CREDIT RISK

     Financial   instruments   which   potentially   subject   Loral   Orion  to
concentrations of credit risk consist  principally of cash and cash equivalents,
restricted and segregated assets and accounts receivable. The Company's cash and
cash  equivalents  and  restricted and  segregated  assets are  maintained  with
high-credit-quality financial institutions.  Management believes that its credit
evaluation,  approval and monitoring  processes combined with negotiated billing
arrangements  mitigate  potential  credit  risks  with  regard to the  Company's
current customer base.

                                       29

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

PROPERTY AND EQUIPMENT

     Property and equipment are carried at cost except for the Orion 1 satellite
which is recorded at estimated  fair market value as of March 31, 1998, the date
of the Loral Merger.  Depreciation expense is calculated using the straight-line
method over the estimated useful lives as follows:

<TABLE>
<S>                                                            <C>       
              Satellite and related equipment..............    10.5 years
              Telecommunications equipment.................    2-7 years
              Furniture and computer equipment.............    2-7 years
</TABLE>

     Costs  incurred  in  connection  with  the   construction   and  successful
deployment of the Orion 1 satellite and related equipment are capitalized.  Such
costs include direct  contract cost,  allocated  indirect  costs,  launch costs,
launch  insurance,  construction  period  interest  and  the  present  value  of
satellite incentive payments. Similar costs for Orion 2 and Orion 3 are included
in "Satellite  construction in progress."  Orion began  depreciating the Orion 1
satellite over its estimated  useful life  commencing on the date of operational
delivery in orbit, January 1995.

 VALUATION OF LONG-LIVED ASSETS AND COSTS IN EXCESS OF NET ASSETS ACQUIRED

     The carrying value of Loral Orion's  long-lived  assets and costs in excess
of net assets acquired is reviewed for impairment  whenever events or changes in
circumstances  indicate that an asset may not be recoverable.  The Company looks
to current and future profitability,  as well as current and future undiscounted
cash flows,  excluding financing costs, as primary indicators of recoverability.
If an  impairment  is  determined  to  exist,  any  related  impairment  loss is
calculated based on fair value.

DEFERRED FINANCING COSTS

     Deferred  financing  costs  related  to a debt  financing  that  was  being
amortized  over the  period the debt was  expected  to be  outstanding.  The net
deferred financing costs outstanding at March 31, 1998 were written off to costs
in excess of net assets acquired  associated with the Loral Merger.  Accumulated
amortization   at  December  31,  1998  and  1997  was  $0  and  $2.3   million,
respectively.  Deferred financing costs of $10.5 million relating to the Orion 1
Credit  Facility were expensed in January 1997 in connection with the Financings
and are included in the caption  "Extraordinary  loss on extinguishment of debt"
for 1997.

COST IN EXCESS OF NET ASSETS ACQUIRED

     Cost in excess of net assets acquired associated with the Merger with Loral
amounted to $619.7  million,  which is being  amortized  over 40 years using the
straight-line method. Accumulated amortization relating to cost in excess of net
assets acquired at December 31, 1998 was $11.7 million.

OTHER ASSETS

     Intangibles  assets  associated with the Loral Merger in 1998 are primarily
amortized  over the  remaining  useful life of Orion 1, which was  approximately
seven years at December  31,  1998.  The net  goodwill at December  31, 1997 was
written off to costs in excess of net assets acquired  associated with the Loral
Merger.  Accumulated  amortization relating to other assets at December 31, 1998
and 1997 was $2.6 million and $6.2 million,  respectively. The Company amortizes
the FCC License  application  costs related to Orion 1 over the estimated useful
life of the satellite.

                                       30


<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

Other  assets,  net of  amortization  as of December  31, 1998 and 1997,  was as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,            
                                                                 ------------------------------ 
                                                                                     1997        
                                                                                  PREDECESSOR    
                                                                     1998           COMPANY       
                                                                 ----------- ------------------ 
                                                                

<S>                                                              <C>              <C>            
Goodwill (related to prior acquisition)..................        $           --   $        20,332
Note receivable .........................................                 2,476             3,039
FCC license application costs ...........................                 1,767             1,781
Intangible assets .......................................                15,261                --
Other  ..................................................                 3,404             2,027
                                                                 --------------   ---------------
                                                                 $       22,908   $        27,179
                                                                 ==============   ===============
</TABLE>


FOREIGN CURRENCY TRANSLATION

     Results of operations for foreign  entities,  primarily the Company's Loral
Orion-Europe GmbH subsidiary, are translated using average exchange rates during
the period.  Assets and  liabilities  are  translated to U.S.  dollars using the
exchange  rate in effect at the balance sheet date.  The  resulting  translation
adjustments are reflected in stockholders' equity (deficit) as accumulated other
comprehensive income (loss).

INTEREST RATE MODIFICATION AGREEMENT

     Orion  entered into an  interest-rate  swap and cap agreement to modify the
interest  characteristics  of the Orion 1 Credit  Facility  from a floating to a
fixed-rate basis. This agreement involved the receipt of floating rate amount in
exchange for fixed-rate interest payments over the life of the agreement without
an  exchange  of the  underlying  principal  amount.  The  differential  paid or
received  was  accrued  as  interest  rates  changed  and was  recognized  as an
adjustment  to interest  expense.  The fair value of the swap  agreement was not
recognized in the financial statements. This agreement was terminated in January
1997 in connection  with the Financings  discussed in Note 1. The Company had no
such agreements in place at December 31, 1998 or 1997.

REVENUE RECOGNITION

     Revenue is recognized  as earned in the period in which  telecommunications
and related services are provided.

     The following  summarizes the Company's  domestic and foreign  revenues (in
thousands):

<TABLE>
<CAPTION>
                                                                           PREDECESSOR COMPANY
                                                             -----------------------------------------------
                                             NINE MONTHS      THREE MONTHS       YEARS ENDED DECEMBER 31,
                                                ENDED            ENDED         -----------------------------
                                            DECEMBER 31,        MARCH 31,
                                                1998              1998              1997             1996
                                            ------------     ------------      -------------    ------------
<S>                                          <C>             <C>               <C>              <C>         
Revenues from unaffiliated customers:
    United States.......................     $     24,001    $       6,895     $     30,927     $     21,262
    Germany ...........................            14,617            4,517           15,437               --
    Other foreign ......................           25,990            7,378           22,284           14,572
Revenues from related parties...........               --               --            4,093            6,013
                                            -------------    -------------     ------------     ------------
Total services revenue..................     $     64,608    $      18,790     $     72,741     $     41,847
                                            =============    =============     ============     ============
</TABLE>

                                       31

<PAGE>



                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

INCOME TAXES

     The Company recognizes deferred tax assets and liabilities for the expected
future consequences of temporary differences between financial reporting and tax
bases of assets and  liabilities  using enacted tax rates that will be in effect
when the differences are expected to reverse.

     Following is a summary of components  of the net deferred  asset balance at
December 31, 1998 and 1997 (in thousands):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                         --------------------------------
                                                                              1997
                                                                          PREDECESSOR
                                                             1998           COMPANY
                                                        --------------   ----------------
<S>                                                     <C>               <C>           
Deferred tax assets:
Net operating loss carryforward .................       $       78,642    $       61,648
Amortization of premium and discount on                                   
  Senior Notes and Senior Discount Notes ........               69,203            11,917
Amortization of intangibles .....................                 (928)            2,947
Other ...........................................                4,560             3,385
                                                        --------------    --------------
                                                               151,477            79,897
Deferred tax liabilities:
Depreciation ....................................               (3,678)          (16,289)
Other ...........................................                 (351)             (741)
                                                        --------------    --------------
                                                                (4,029)          (17,030)
                                                        --------------    --------------
Net deferred tax asset ..........................              147,448            62,867

Valuation allowance..............................              (93,533)          (62,867)
                                                        --------------    --------------
Net deferred tax asset, after
  valuation allowance............................       $       53,915    $          --
                                                        ==============    ==============          
</TABLE>

     At December 31, 1998, Loral Orion had  approximately  $225.9 million in net
operating  loss  carryforwards  which expire at varying  dates from 2004 through
2013.  The use of these loss  carryforwards,  may be limited  under the Internal
Revenue Code as a result of ownership changes experienced by Loral Orion. Due to
uncertainty  regarding its ability to realize the benefits of such net operating
loss  carryforwards  and certain  other net  deferred  tax  assets,  the Company
established a valuation allowance against deferred tax assets of $93.5 million.

     In 1998, the Company is included in the U.S.  federal income tax return for
Loral.  Pursuant to a tax sharing  agreement for 1998 with Loral, the Company is
entitled  to  reimbursement  for the use of its tax losses  when such losses are
utilized by Loral.  For the nine months ended  December  31,  1998,  the Company
recorded a receivable  under this tax sharing  agreement of  approximately  $4.9
million and a deferred tax provision of approximately $3.8 million, resulting in
a net tax benefit of  approximately  $1.1 million.  The Company's  effective tax
benefit  rate (1%)  differs from the federal  statutory  rate (35%),  due to the
valuation  allowance  established  for the  carryforward of the current year tax
loss (29%) and the  non-deductible  amortization of cost in excess of net assets
acquired  (5%).  The  deferred  tax asset of $53.9  million on the  accompanying
balance sheet primarily arises from the tax effect of the temporary  differences
between the carrying  amount of the Senior Notes and the Senior  Discount  Notes
payable for financial and income tax purposes.

                                       32


<PAGE>

                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)


STATEMENTS OF CASH FLOWS

     Non-cash  investing and financing  activities  and  supplemental  cash flow
information is (in thousands):

<TABLE>
<CAPTION>
                                                                                           PREDECESSOR COMPANY
                                                                           ---------------------------------------------------
                                                       NINE MONTHS         THREE MONTHS            YEARS ENDED DECEMBER 31,
                                                          ENDED               ENDED            -------------------------------
                                                       DECEMBER 31,         MARCH 31,
                                                           1998                1998                1997                1996
                                                       ------------        -----------         -------------       -----------
<S>                                                   <C>                <C>                 <C>                  <C>            
Property and equipment financed by
   capital leases                                     $            --    $             --    $             --     $           482
Preferred stock dividend, net of forfeitures                       --              (1,387)              6,034               1,370
Conversion of redeemable preferred stock to
   common stock                                                    --              69,888              38,846                 805
Conversion of subordinated debentures,
   accrued interest and deferred financing
   costs to common stock                                           --              50,000              10,292                  --
Conversion of Company common stock to
   Loral common stock as the result of the
   Loral Merger                                                    --             469,000                  --                  --
Issuance of Series C preferred stock                               --                  --              94,000                  --
Issuance of common stock for preferred
   stock dividend                                                  --               5,458               2,070                  --
Issuance of common stock and warrants                              --               4,757              13,407                 300
Interest paid                                                  25,551              25,237              35,573              20,619
Acquisition of Teleport Europe, net of
   cash acquired                                                   --                  --               8,375                  --
</TABLE>



     Included in accounts  receivable and other current  liabilities at December
31,  1998 and March 31,  1998 are  customer  deposits  and up front fees of $3.4
million and in $1.1 million, respectively.

USE OF ESTIMATES

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying notes. Actual results could differ from those estimates.

EARNINGS PER SHARE

         Earnings  per  share  is  not  presented  since  it is  not  considered
meaningful due to the Loral Merger and the recapitalization of the Company.


                                       33

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  - (CONTINUED)

COMPREHENSIVE INCOME

     On January 1, 1998, the Company adopted  Statement of Financial  Accounting
Standards  No.  130,   Reporting   Comprehensive   Income  ("SFAS  130"),  which
established  rules for the reporting and disclosure of comprehensive  income and
its components.  SFAS 130 requires  unrealized  gains or losses on the Company's
foreign currency  translation  adjustments to be included in other comprehensive
income  (loss).  Prior years  amounts  have been  restated.  The  components  of
accumulated other comprehensive income (loss) are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                       PREDECESSOR COMPANY
                                                                 -------------------------------
                                                NINE MONTHS       THREE MONTHS
                                                   ENDED             ENDED          YEAR ENDED
                                                DECEMBER 31,       MARCH 31,       DECEMBER 31,
                                                    1998              1998             1997
                                              --------------     -------------     -------------
<S>                                           <C>               <C>               <C>            
Cumulative translation adjustment .......     $          616    $           --    $         (956)
                                              --------------    --------------    --------------
Accumulated other comprehensive
  income (loss) .........................     $          616                --    $         (956)
                                              ==============    ==============    ==============
</TABLE>


ACCOUNTING PRONOUNCEMENTS

     For the  year  ended  1998  the  Company  adopted  Statement  of  Financial
Accounting  Standards No. 131,  Disclosures  About Segments of an Enterprise and
Related Information ("SFAS 131"), see Note 8.

     In June 1998, the Financial Accounting Standards Board issued Statement No.
133 Accounting for Derivative  Instruments and Hedging  Activities ("SFAS 133"),
which requires that all derivative  instruments be recorded on the balance sheet
at their fair value.  Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge  transaction and, if it is, the type
of hedge  transaction.  The Company has not yet  determined  the impact that the
adoption  of SFAS 133 will  have on its  earnings  or  financial  position.  The
Company is required to adopt SFAS 133 on January 1, 2000.

RECLASSIFICATIONS

     Certain prior year amounts have been reclassified to conform to the current
year presentation.


                                       34

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

3.  ORION ATLANTIC

     Orion  Atlantic  was a  Delaware  limited  partnership  formed  to  provide
international private communications networks and basic transponder capacity and
capacity  services  (including  ancillary  ground  services) to  businesses  and
institutions with  trans-Atlantic and  intra-European  needs. As of December 31,
1998,  Orion Atlantic  merged with Loral Orion  Services,  Inc. The business was
organized by Orion Network Services,  the general partner of Orion Atlantic. The
principal purposes of Orion Atlantic was to finance the construction, launch and
operation of up to two  telecommunications  satellites in  geosynchronous  orbit
over the  Atlantic  Ocean and to  establish  a  multinational  sales and service
organization.  Eight  international  corporations,  including Orion,  invested a
total of $90  million in equity as limited  partners  in Orion  Atlantic.  Orion
Atlantic  through January 1997, was financed by a credit facility which provided
up  to  $251  million  for  the  first  satellite  from  a  syndicate  of  major
international  banks led by Chase  Manhattan  Bank,  N.A.  In  addition to their
equity  investments,  the Limited  Partners had agreed to lease  capacity on the
satellites  up to an  aggregate  $155  million and had entered  into  additional
contingent capacity lease contracts  ("contingent call") up to an aggregate $271
million,  as support for repayment of the senior debt. The firm capacity  leases
and  contingent  calls were payable  over a seven-year  period after the Orion 1
satellite was placed in service. In July 1995, January and July 1996 the Limited
Partners  (excluding  the Company)  paid $7.6  million,  $18.0 million and $12.1
million, respectively, pursuant to the contingent calls. As discussed in Note 1,
in January 1997, the Company acquired all of the limited  partnership  interests
it did not already own in Orion Atlantic.

     Orion 1 -- The fixed base price of Orion 1, excluding  obligations relating
to satellite performance, aggregated $227 million. In addition to the fixed base
price,  the  contract  required  payments  in lieu of a further  contract  price
increase,  aggregating approximately $44 million through 2007. Such payments are
due,  generally,   if  24  out  of  34  satellite   transponders  are  operating
satisfactorily.  Shortly after  acceptance of the satellite in January 1995, the
Company filed a warranty claim with the satellite  manufacturer  relating to one
transponder that was not performing in accordance with contract  specifications.
In August 1995, Orion Atlantic received a one time refund of $2.75 million which
was applied as a mandatory  prepayment to the senior notes payable -- banks. The
Company believes that since Orion 1 is properly deployed and operational,  based
upon  industry  data  and  experience,  payment  of  the  satellite  performance
obligation is highly  probable and the Company  capitalized the present value of
this  obligation  of  approximately  $14.8  million  as part of the  cost of the
satellite.  The present value was estimated by discounting  the obligation at 14
percent.  As of March  31,  1998,  in  association  with the Loral  Merger,  the
obligation was revalued and recorded at  approximately  $16.2 million using a 12
percent discount rate over the remaining expected term.

     Redemption of STET Partnership Interest; Issuance of New Interest to Orion.
-- In November 1995 Orion  Atlantic  redeemed the limited  partnership  interest
held by STET (the "STET  Redemption") for $11.5 million,  including $3.5 million
of cash and $8 million in 12 percent  promissory notes due through 1997.  STET's
firm and  contingent  capacity  leases  remained in place until  released by the
Banks  under  the  Orion  1  Credit   Facility.   STET's  existing   contractual
arrangements  with  Orion  Atlantic  were  modified  in a  number  of  respects,
including (i) a reduction of approximately  $3.5 million in amounts due by Orion
Atlantic to  Telespazio  S.p.A.,  an affiliate of STET,  over a ten-year  period
under  contracts  relating to the  construction  of Orion 2,  back-up  tracking,
telemetry  and  command  services  through a facility  in Italy and  engineering
consulting   services,   (ii)  the   establishment  of  ground   operations  and
distribution  agreements between Orion Atlantic and Telecom Italia, a subsidiary
of STET,  relating to Italy,  and the  granting to Telecom  Italia of  exclusive
marketing rights relating to Italy for a period ending December 1998 conditioned
upon  Telecom  Italia  achieving  certain  sales  quotas,  and  (iii)  canceling
exclusive ground operations and sales  representation  agreements  between Orion
Atlantic and STET (or its affiliates) relating to Eastern Europe.

     Orion  Atlantic  funded  the  STET  Redemption  by  selling  a new  limited
partnership interest to Orion for $8 million (including $3.5 million in cash and
$4.5 million in 12 percent  promissory  notes due through  1997).  In connection
with the STET redemption,  Orion agreed to indemnify Telecom Italia for payments
which were made in July 1995 of  $950,000  and which would be made in the future
under its firm and contingent capacity agreements with Orion Atlantic and posted
a $10 million letter of credit to support such indemnity.  The Company accounted
for this transaction as an acquisition of a minority  interest and, as a result,
approximately  $3.1  million was  allocated to the cost of the Orion 1 satellite
and related equipment.


                                       35

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

3.  ORION ATLANTIC - (CONTINUED)

     During 1995,  Orion Atlantic  entered into  agreements with certain Limited
Partners (including the Company) under which the participating  Limited Partners
voluntarily  gave up their rights to receive  capacity under their firm capacity
agreements through January 1996. The participating Limited Partners continued to
make payments for such capacity but have the right to receive refunds from Orion
Atlantic out of cash  available  after  operating  costs and payments  under the
Credit  Facility.  In addition,  services revenue included $4.1 million and $6.0
million in 1997 and 1996 from  Limited  partners  pursuant to the firm  capacity
commitments, not subject to refund. In connection with the Exchange described in
Note 1, such rights were acquired by the Company.

4.  COMMITMENTS AND CONTINGENCIES

     Orion 1 -- In November 1995, a portion of the Orion 1 satellite experienced
an  anomaly  that  resulted  in  a  temporary  service   interruption,   lasting
approximately two hours, in the dedicated  capacity serving the European portion
of Orion  Atlantic's  services.  Full  service  to all  affected  customers  was
restored using redundant equipment on the satellite. The Company believes, based
on the data and the Telesat  Report,  that,  because the redundant  component is
functioning fully in accordance with  specifications  and the performance record
of similar  components is strong,  the anomalous  behavior is unlikely to affect
the expected  performance  of the satellite  over its useful life.  Furthermore,
there  has been no  effect on the  Company's  ability  to  provide  services  to
customers.  However,  in the event that the currently operating component fails,
Orion 1 would experience a significant  loss of usable capacity.  In such event,
while the Company would be entitled to insurance  proceeds of approximately  $47
million as of December 1998, and could lease  replacement  capacity and function
as a reseller with respect to such  capacity,  the loss of capacity would have a
material adverse effect on the Company.

     Orion 2 -- In July 1996,  the Company  signed a contract with Matra Marconi
Space  ("Matra") for the  construction  and launch of Orion 2 (which was amended
and restated in January 1997) and in February 1997 Matra commenced  construction
of that satellite. During the second quarter of 1998, the Company entered into a
satellite procurement contract with Space Systems/Loral ("SS/L"), a wholly owned
subsidiary of Loral,  for the  construction  and launch of the Orion 2 satellite
for the  operation  in the  Atlantic  Ocean  region  at 12(0)  W.L.  (the  "SS/L
Conract").  The SS/L  Contract  provides  for  delivery  in-orbit of the Orion 2
satellite  aboard an Ariane 44L launch vehicle in the third quarter of 1999. The
SS/L  satellite  design  provides  for 38 Ku-band  transponder  with a footprint
covering  the  Eastern  United  States,   Southeastern   Canada,   Europe,   the
Commonwealth of Independent  States, the Middle East, North and South Africa and
South America.

     During 1998,  the Company  notified  Matra that it cancelled  its satellite
procurement  contract with Matra for the  construction and launch of a satellite
for operation in the Atlantic Ocean region at 12(0) W.L. (the "Matra Contract").
As a result of the cancellation of the Matra Contract,  the Company will have no
obligation  to make  further  payments  to  Matra,  but Matra  retained  amounts
previously  paid by the  Company  of $49.1  million.  As of March 31,  1998,  in
association with the Loral Merger,  these costs and other internal direct costs,
totaling   approximately  $62  million,   capitalized  in  connection  with  the
construction  of the Orion 2  satellite,  were written off to costs in excess of
net assets acquired.

     The Company  believes that the Orion 2 satellite  being  procured from SS/L
offers significant benefits compared to the Matra satellite.  Loral Orion's cash
will be used to fund the SS/L  Contract up to an amount that,  when added to the
amounts previously paid to Matra, will not exceed $202 million, the total amount
that would  otherwise  have been due to Matra if the Matra Contract had not been
canceled. Any requirements to SS/L in excess of $202 million for Orion 2 will be
funded with additional equity  contributed by Loral.  Through December 31, 1998,
$128.4  million has been paid to SS/L for Orion 2. Moreover,  the  SS/L-designed
satellite is both larger and more  powerful than the  Matra-designed  satellite.
The SS/L satellite will have 8 additional  transponders and will provide greater
transmitted power to Loral Orion's customers.  The expected in-orbit life of the
SS/L  satellite  is  approximately  16 years  compared to 13 years for the Matra
satellite.  The SS/L  satellite  is  designed  to provide  enhanced  transponder
switching  capabilities  as compared to the Matra  satellite and also allows for
both uplinking and  downlinking of  transmissions  from South Africa,  while the
Matra satellite would not have allowed for uplinking.

     Orion  3  --  In  January  1997,  the  Company  entered  into  a  satellite
procurement  contract with Hughes Space for the construction and launch of Orion
3, for which construction  commenced in December 1996. The contract provides for
delivery in orbit of Orion 3, for a firm fixed price of $203 million,  excluding
launch insurance and $8 million of incentive payments.  Orion 3 will cover broad
areas of the Asia Pacific region including China, Japan, Korea,  Southeast Asia,
Australia, New Zealand, Eastern Russia and Hawaii.

                                       36
<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

4.  COMMITMENTS AND CONTINGENCIES - (CONTINUED)

     In November 1996, Orion entered into a contract with DACOM Corp. ("DACOM"),
a Korean  communications  company,  under which,  subject to certain conditions,
DACOM will purchase eight  dedicated  transponders  on Orion 3 for 13 years,  in
return for approximately  $89 million,  payable over a period from December 1996
through seven months following the lease commencement date for the transponders.
DACOM has  deposited  funds with Orion in accordance  with the  contract.  As of
December 31, 1998,  Loral Orion had received $35.5 million from DACOM  including
interest of $1.5  million.  As of December  31,  1997,  Loral Orion had received
$22.3  million  from DACOM.  Loral Orion  maintained a $22.3  million  letter of
credit which was released on August 1, 1998. Orion had an obligation to maintain
a letter of credit for seven months beginning on the lease  commencement date in
the  amount  of $44.8  million.  Payments  are  subject  to refund  pending  the
successful launch and commencement of commercial operation of Orion 3.

     Agreements  with Loral  Skynet - During the fourth  quarter of 1998,  Loral
completed its  integration  plan for Loral Orion and  transferred  management of
Loral  Orion's  satellite  capacity  leasing and  satellite  operations to Loral
Skynet,  effective  January 1, 1999. Orion and Loral Skynet, a division of Loral
SpaceCom Corporation,  which in turn is a wholly-owned subsidiary of Loral, have
entered into agreements  (the "Loral Skynet  Agreements")  effective  January 1,
1999,  whereby  Loral  Skynet  provides  to Orion  (i)  marketing  and  sales of
satellite  capacity  services on the Orion satellite network and related billing
and  administration  of  customer  contracts  for  those  services  (the  "Sales
Services")  and (ii)  telemetry,  tracking  and control  services  for the Orion
satellite  network  (the  "Technical  Services",  and  together  with the  Sales
Services,  the  "Services").  Orion will be  charged  Loral  Skynet's  costs for
providing these services plus a 5 percent administrative fee.

     Litigation  --  On  November  9,  1996,   Orion  and  Skydata   Corporation
("Skydata")  executed a letter with respect to the settlement in full of pending
litigation  and  arbitration  related  to a  patent  dispute.  As  part  of  the
settlement,   Skydata  granted  Orion  (and  its  affiliates)  an  unrestricted,
world-wide  paid-up  license to make, have made, use or sell products or methods
under the patent and all other  corresponding  continuation and reissue patents.
Orion has paid Skydata $437,000 during 1997 and 1998 as part of this settlement.

     Loral Orion is party to various  litigation arising in the normal course of
its operations.  In the opinion of management,  the ultimate liability for these
matters,  if any,  will not have a  material  adverse  effect  on Loral  Orion's
financial position or results of operations.

     Other -- Orion has entered into operating  leases,  principally  for office
space.  Rent  expense was $1.9  million,  $0.4  million,  $1.3  million and $0.9
million for the nine months ended  December  31, 1998,  three months ended March
31, 1998 and years ended December 31, 1997 and 1996, respectively.

     Future minimum lease payments are as follows (in thousands):


<TABLE>
<S>                                                       <C>          
                    1999............................      $      2,244 
                    2000............................               416 
                    2001............................                46 
                    2002............................                46 
                    2003............................                46 
                    Thereafter......................               506 
                                                          ------------
                                                          $      3,304 
                                                          ------------
</TABLE>

                                       37
<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

5.  LONG-TERM DEBT

     Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                     ---------------------------
                                                                                       1997
                                                                                    PREDECESSOR
                                                                         1998          COMPANY
                                                                     ----------- ----------------
<S>                                                              <C>              <C>            
Senior notes (net of premium of $64.6 at December 31,
  1998 and unamortized discount of $4.9 million at                                 
  December 31, 1997) ..................................          $      507,573   $       440,100
Senior discount notes (maturity value of $484 million).                 408,812           292,337
Convertible junior subordinated debentures...........                        --            50,000
Notes payable - TT&C Facility..........................                   4,953             6,022
Satellite incentive obligations........................                  11,376             6,479
Other..................................................                     781             2,139
                                                                 --------------   ---------------
     Total long-term debt..............................                 933,495           797,077
Less: current portion..................................                  (1,826)           (6,406)
                                                                 --------------   ---------------
     Long-term debt less current portion...............          $      931,669   $       790,671
                                                                 ==============   ===============
</TABLE>

     Total  interest  (including  commitment  fees,   capitalized  interest  and
amortization  of deferred  financing  costs)  incurred for the nine months ended
December  31, 1998,  three months ended March 31, 1998 and years ended  December
31, 1997 and 1996 was $62.8  million,  $24.5  million,  $91.1  million and $27.8
million,  respectively.  Capitalized interest for the nine months ended December
31, 1998,  three  months ended March 31, 1998 and year ended  December 31, 1997,
was $16.4 million, $3.3 million and $7.3 million,  respectively.  No capitalized
interest was recorded in 1996.  Aggregate  annual  maturities of long-term  debt
consist of the following (in thousands):


<TABLE>
<S>                                                   <C>             
                         1999.......................  $         1,826 
                         2000.......................            1,985 
                         2001.......................            2,382 
                         2002.......................            2,891 
                         2003.......................            1,728 
                         Thereafter.................          922,683 
                                                      ---------------
                                                      $       933,495 
                                                      ===============
</TABLE>

     Senior Notes and Senior  Discount Notes -- On January 31, 1997, the Company
completed a $710  million  bond  offering  (the "Bond  Offering")  comprised  of
approximately  $445 million of Senior Note Units,  each of which consists of one
11.25 percent Senior Note due 2007 (a "Senior Note") and one Warrant to purchase
0.8463 shares of common stock,  par value $.01 per share ("Common Stock") of the
Company (a "Senior Note Warrant"),  and  approximately  $265.4 million of Senior
Discount Note Units,  each of which consists of one 12.5 percent Senior Discount
Note due 2007 (a "Senior Discount Note," and together with the Senior Notes, the
"Notes")  and one  Warrant  to  purchase  0.6628  shares of Common  Stock of the
Company (a "Senior  Discount  Note  Warrant  and  together  with the Senior Note
Warrants, the "Warrants"). Interest on the Senior Notes is payable semi-annually
in cash on January 15 and July 15 of each year,  commencing  July 15, 1997.  The
Senior  Discount  Notes do not pay cash  interest  prior to  January  15,  2002.
Thereafter,  cash  interest  accrues  until  maturity  at an annual rate of 12.5
percent  payable  semi-annually  on  January  15,  and  July  15 of  each  year,
commencing  July 15, 2002. The exercise price for the Warrants is $.01 per share
of common stock of the Company. These warrants were assumed by Loral as a result
of the Loral Merger.  The Company made cash  interest  payments of $25.0 million
and $24.9  million  in  January  1998 and July  1998 on the  Senior  Notes.  The
indentures  supporting  the Senior Notes and the Senior  Discount  Notes contain
certain  covenants  which,  among  other  things,   restrict   distributions  to
stockholders of the Company,  the repurchase of equity  interests in the Company
and the  making of  certain  other  investments  and  restricted  payments,  the
incurrence  of  additional  indebtedness  by  the  Company  and  its  restricted
subsidiaries,  the  creation of liens,  certain  asset sales,  transaction  with
affiliates and related parties,  and mergers and consolidations.  The Company is
in compliance with the requirements of such

                                       38

<PAGE>



                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

5.  LONG-TERM DEBT - (CONTINUED)

indentures. The exercise price for the Warrants will be $.01 per share of common
stock. There were 697,400 Warrants issued in connection with the Notes (see Note
6). On May 27, 1998,  $2 million of Senior Notes were redeemed at 101 percent of
the principal amount of the notes plus accrued interest to the payment date, and
resulted in a gain on retirement of debt of approximately $.3 million.

     Convertible  Junior  Subordinated  Debentures  -- On January 31,  1997,  in
connection  with the Financings  discussed in Note 1, the Company  completed the
sale of $60  million of its  convertible  junior  subordinated  debentures  (the
"Convertible  Debentures") to two investors,  British Aerospace  Holdings,  Inc.
("British  Aerospace")  and  Matra  Marconi  Space UK  Limited  ("Matra  Marconi
Space").  British Aerospace purchased $50 million of the Convertible  Debentures
and Matra Marconi Space purchased $10 million of the Convertible Debentures. The
Convertible  Debentures  were to mature in 2012,  and bore interest at a rate of
8.75 percent per annum that was to be paid  semi-annually  in arrears  solely in
Common Stock of the Company. The Convertible Debentures were subordinated to all
other  indebtedness  of the Company,  including  the Notes.  Matra Marconi Space
converted their $10 million of Convertible  Debentures and accrued interest into
735,292  shares  of  common  stock in  December  1997.  In March  1998,  British
Aerospace  converted  their $50 million of  Convertible  Debentures  and accrued
interest into  approximately  3.6 million shares of common stock. As of December
31, 1998, all of the debentures had been converted to common stock.

     The net proceeds of the Bond Offering and Debentures  Offering were used by
the Company to repay the Orion 1 credit facility, pre-fund the first three years
of  interest  payments  on certain  of the Notes,  and will be used to build and
launch two additional satellites, Orion 2 and Orion 3.

     The  extraordinary  loss on extinguishment of debt of $15.8 million in 1997
was the result of expensing,  unamortized  deferred  financing costs  associated
with the Orion 1 credit facility which was refinanced with the proceeds from the
Bond Offering and termination of a interest rate cap agreement.

     Note Payable - TT&C  Facility -- In June 1995 upon  acceptance  of the TT&C
Facility,  the Company  refinanced  $9.3 million from  General  Electric  Credit
Corporation as a seven-year  term loan,  payable  monthly.  The interest rate is
fixed at 13.5  percent.  The TT&C  debt is  secured  by the TT&C  Facility,  the
Satellite Control System Contract and Orion Atlantic's leasehold interest in the
TT&C  Facility   land.   The  TT&C  financing   agreement   contains   customary
representations,  warranties and covenants  regarding certain  activities of the
Company.  The Company is in compliance  with the  requirements  of the financing
agreement.

     Satellite  Incentive  Obligations --The  obligations  relating to satellite
performance  have been recorded at the present value  (discounted  at 14 percent
for the Predecessor Company and 12 percent after the Loral Merger, the Company's
estimated  incremental  borrowing rate for unsecured  financing) of the required
payments  commencing at the  originally  scheduled  maturity of the senior notes
payable  to  banks  and  continuing   through  2007.  Under  the  terms  of  the
construction  contract,  payment of the obligation is delayed until such time as
payment is  permitted  under the senior  notes  payable to banks.  During  1998,
payments aggregating $7.2 million were made pursuant to this obligation.

     Notes Payable - STET -- In connection with the STET Redemption, the Company
issued $8 million of promissory  notes bearing interest at 12 percent per annum.
Payments  were due as  follows:  $2.5  million  plus  accrued  interest  paid on
December 31, 1996; $3.5 million plus accrued interest on the earlier of December
31, 1997 or the refinancing of the senior notes payable-banks; and the remaining
$2.0 million in monthly  installments  of $0.2  million  plus  accrued  interest
beginning  January 1997. At December 31, 1997, the $8 million  promissory  notes
issued in connection with the STET Redemption had been repaid.

     Notes  Payable - Limited  Partners -- In January 1997,  the Company  issued
Series C Convertible Preferred Stock in exchange for the Preferred Participation
Units (PPUs) aggregating $8.1 million due to certain former Limited Partners for
development  of Orion  Atlantic's  network  services  business.  Holders of PPUs
earned interest on aggregate  amounts drawn at the rate of 30 percent per annum.
As of March  31,  1998,  the  Series C  Convertible  Preferred  Stock  issued in
exchange for the PPUs have been converted to common stock.

                                       39

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

6.  REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

     As of March 31, 1998, all of the  redeemable  convertible  preferred  stock
outstanding  at December  31,  1997,  including  accrued  dividends  on Series C
Preferred  Stock were  converted to  approximately  6.1 million shares of common
stock at prices ranging from $8.50 to $17.80 per share.

     Redeemable Preferred Stock

     In June 1994,  Orion issued 11,500 shares of Series A 8 percent  Cumulative
Redeemable Convertible Preferred Stock at $1,000 per share and granted an option
to purchase an additional 3,833 shares of similar  preferred stock at $1,000 per
share.  Dividends  on  preferred  stock  accrued at 8 percent  per year and were
payable as and when  declared.  Orion could  redeem the  preferred  stock at the
amount invested plus accrued and unpaid dividends.  Upon such a redemption,  the
preferred  stockholders  were to receive a warrant to acquire at $8.50 per share
the  number of  shares  of common  stock  into  which  the  preferred  stock was
convertible.  The 11,500 shares issued were convertible into 1,352,941 shares of
common stock ($8.50 per share).  Upon  conversion  accrued and unpaid  dividends
were  forfeited.  After Orion issued  preferred  stock (along with  warrants and
options to make an  additional  investment)  in June  1994,  the  Directors  and
affiliates  of Directors  who  purchased  common stock in December  1993 and the
institutions  and other  investors who purchased  common stock in June 1994 each
exercised its right to receive  preferred stock (along with warrants and options
to make an additional  investment)  in exchange for the common stock  previously
acquired  and Orion  issued an  aggregate  of 3,000 shares of Series A Preferred
Stock and related  options for 1,000  shares to such persons and  entities.  The
3,000 shares issued were  convertible into 352,941 shares of common stock ($8.50
per share).  Through  December  31, 1997,  7,567 shares of preferred  stock were
converted  into  890,235  shares of common  stock.  The  remaining  6,933 shares
outstanding were convertible into 815,647 shares of common stock at December 31,
1997. All Series A Preferred  Stock  outstanding was converted into common stock
in connection with the Loral Merger.

         In June 1995, certain Directors,  affiliates of Directors,  and certain
holders of Series A Preferred Stock purchased 4,483 shares of Series B Preferred
Stock for  approximately  $4.5 million.  This purchase was pursuant to an option
granted in June 1995 to purchase $1 of preferred  stock  similar to the Series A
Preferred  Stock for each $3 of Series A Preferred Stock purchased in June 1994,
except that such similar  preferred  stock would be convertible at any time with
Common  Stock at a price  within a range of $10.20 to $17.00 per share of common
stock based upon when the option is exercised.  The Series B Preferred Stock had
rights,  designations  and  preferences  substantially  similar  to those of the
Series A Preferred Stock, and was subject to similar covenants,  except that the
Series B Preferred Stock was convertible  into 439,510 shares of Common Stock at
an  initial  price  of  $10.20  per  share,  subject  to  certain  anti-dilution
adjustments,  and  purchases  of Series B Preferred  Stock did not result in the
purchaser receiving any rights to purchase additional  preferred stock.  Through
December 31, 1997,  2,424 shares of preferred  stock were converted into 237,647
shares of common stock. The remaining 2,059 shares  outstanding were convertible
into 201,862 shares of common stock at December 31, 1997. All Series B Preferred
Stock  outstanding  was converted into common stock in connection with the Loral
Merger.

         In January  1997,  Orion issued  123,172  shares of Series C Cumulative
Redeemable  Preferred Stock to British Aerospace  Communications,  Inc., COM DEV
Satellite Communications Limited, Kingston Communications International Limited,
Lockheed  Martin  Commercial  Launch  Services,  Inc.,  MCN  Sat US,  Inc.,  and
Trans-Atlantic  Satellite, Inc. in exchange for their Orion Atlantic partnership
interests.  Dividends on the  preferred  stock accrued at 6 percent per year and
were  distributable in the Company's common stock calculated based on the market
price of such stock under a formula provided in the Certificate of Designations.
The shares were  convertible  into  approximately  7 million  shares ($17.50 per
share) of the Company's common stock.  Through December 31, 1997,  40,531 shares
of preferred stock,  including dividends,  were converted into approximately 2.4
million shares of common stock. Series C Cumulative Preferred Stock was recorded
net of deferred  offering  costs of  approximately  $3.3  million.  The Series C
Cumulative  Preferred Stock was subject to mandatory  redemption at par value in
25 years.  The  difference  between the  carrying  value and par value was being
accreted over such period.

     The  preferred  stock  had a  liquidation  preference  equal to the  amount
invested plus accrued and unpaid dividends. Preferred stockholders were entitled
to vote on an  as-converted  basis  and had the  right to put the stock to Loral
Orion upon a merger,  change of control or sale of  substantially  all assets at
the greater of liquidation value or fair value. All Series C Preferred Stock was
converted into common stock in connection with the Loral Merger.

                                       40
<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

6.  REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED)

Stockholders' Equity

     1987  Employee  Stock  Option Plan - Under the 1987  Employee  Stock Option
Plan,  1,470,588 shares of common stock were reserved for issuance upon exercise
of options granted.  Shares of common stock were generally  purchased under this
plan at prices not less than the fair market  value,  as determined by the Board
of Directors, on the date the option was granted.

     Stock options outstanding at:

<TABLE>
<CAPTION>
                                                         PREDECESSOR COMPANY
                                          -----------------------------------------------
                                             MARCH 31,      DECEMBER 31,     DECEMBER 31,
                                               1998             1997             1996
                                          -------------  ---------------  ---------------

<S>                                        <C>              <C>             <C>           
Range of exercise price..............      $8.16 - $12.29   $8.16 - $12.29  $8.16 - $12.24

Outstanding at  beginning of year ...          1,174,310          911,663          971,469
Granted during year..................                 --          400,670          122,750
Exercised............................           (157,041)         (81,383)         (37,629)
Canceled                                          (1,250)         (56,640)        (144,927)
Converted to options to acquire
  Loral common stock ................         (1,016,019)              --               --
                                           -------------    -------------   --------------
Outstanding at end of year...........                 --        1,174,310          911,663
                                           =============    =============   ==============
</TABLE>

     In November  1993,  stock  options for 95,588  shares of common  stock were
granted to key executives  which may be exercised  only upon the  achievement of
certain business and financial objectives.  At December 31, 1995, the executives
had  earned  the  right  to  exercise  40,441  of  these  options  based  on the
achievement of such objectives. The remaining options were canceled during 1996.

     Stock options vested annually over a one to five-year  period.  All options
were  exercisable  up to seven years from the date of grant.  The Company's 1987
Employee  Stock Option Plan expired in 1997. No further shares are available for
grant under this plan.  There were 506,803 and 429,265  options  exercisable  at
December 31, 1997 and 1996, respectively.

     In July 1996, the Company  granted,  subject to shareholder  approval,  the
Chairman of the Executive  Committee  100,000 options at $9.83 per share.  These
options vested as follows, 50,000 on January 17, 1997 and 50,000 upon successful
completion  of either a  refinancing  of the Orion 1  satellite,  financing  for
construction,  launch  and  insurance  for  Orion 2 or Orion 3 or a  substantial
acquisition or relationship with a strategic  partner.  These  requirements were
met in January 1997.

     In March 1998, the 1997 Employee Stock Option Plan was assumed by Loral and
all outstanding options were converted to options to acquire Loral common stock.

     Non-Employee  Director  Stock  Option  Plan  - In  1996,  Orion  adopted  a
Non-Employee  Director  Stock Option plan.  Under this plan,  380,000  shares of
common stock were reserved for issuance.  During 1997, there were 80,000 options
granted  pursuant  to this  plan at $9.60  per  share.  At  December  31,  1997,
aggregate options  outstanding  pursuant to this plan totaled 270,000, of which,
180,000 were exercisable at prices ranging from $8.49 to $12.53 per share.

     In March 1998, the  Non-Employee  Director Stock Option Plan was assumed by
Loral and all  outstanding  options were  converted to options to acquire  Loral
common stock.

     1997  Employee  Stock Option Plan - In 1997,  Orion  adopted a second stock
option plan. Under this plan, as amended,  1,300,000 shares of common stock were
reserved for issuance upon exercise of options  granted.  Shares of common stock
could be  purchased  under  this plan at prices  not less than the fair value as
determined by the Board of Directors, on the date the option were granted.


                                       41

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

6.  REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED)

     Compensation expense relating to these plans was not significant.

     Stock options outstanding at:

<TABLE>
<CAPTION>
                                                 PREDECESSOR COMPANY
                                             ----------------------------
                                             MARCH 31,       DECEMBER 31,
                                                1998             1997
                                          ----------------  ---------------


<S>                                       <C>               <C>           
Range of exercise price.............      $9.30 - $17.06    $9.30 - $17.06
                                          ================  ================

Outstanding at beginning of year....             552,000                --
Granted during year.................                  --           556,000
Exercised  .........................              (5,000)               --
Canceled   .........................             (80,000)           (4,000)
Converted to options to acquire
  Loral common stock ...............            (467,000)               --
                                           -------------     -------------
Outstanding at end of year..........       $          --     $     552,000
                                           =============     ==============
</TABLE>

     There were 62,500 options exercisable at December 31, 1997.

     In March 1998, the 1997 Employee Stock Option Plan was assumed by Loral and
all outstanding options were converted to options to acquire Loral common stock.

     The Company has elected to continue to follow  Accounting  Principles Board
Opinion No. 25,  Accounting for Stock Issued to Employees ("APB 25") and related
Interpretations  in  accounting  for its  employee  stock based award  programs,
because the alternative fair value accounting  provided for under FASB Statement
No. 123, Accounting for Stock Based Compensation ("SFAS 123") which is effective
for awards after January 1, 1996,  requires use of option  valuation models that
were not developed for use in valuing employee stock options. Under APB 25, when
the  exercise  price  of the  employee  award  equals  the  market  price of the
underlying  stock on the date of grant, as has been the case  historically  with
the Company's awards, no compensation expense is recognized.

     Pro forma information  regarding net income and earnings per share required
by SFAS 123, has been  determined  as if the Company had accounted for its stock
options under the fair value method of that  statement.  The fair value of these
options was estimated at the date of the grant using a  Black-Scholes  valuation
model with the following assumptions:


<TABLE>
<CAPTION>

                                                        PREDECESSOR COMPANY
                                            ----------------------------------------
                                            MARCH 31,
                                               1998            1997             1996
                                            -------------  -------------   ----------

<S>                                            <C>              <C>             <C> 
Risk-free interest rate .............          6.5%             6.5%            6.5%
Expected dividend yields ............          0.0%             0.0%            0.0%
Expected life of option .............        6.5 years       6.5 years        5.8 years
Volatility of the Company's stock ...           69%             69%              68%
</TABLE>

     For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the option's vesting period. The effect
of applying SFAS 123 on pro forma net loss is not necessarily  representative of
the effects on reported net loss for future  years due to,  among other  things,
(1) the vesting period of the stock options and the (2) fair value of additional
stock options in future years. The Company's  adjusted pro forma information are
as follows (in thousands, except per share information):

                                       42

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

6.  REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED)


<TABLE>
<CAPTION>
                                                               PREDECESSOR COMPANY
                                                  -------------------------------------------
                                                   THREE MONTHS
                                                       ENDED
                                                     MARCH 31,        
                                                       1998             1997           1996
                                                  --------------    ------------   ----------
<S>                                                <C>             <C>             <C>           
Adjusted pro forma net loss ................       $      (40,777) $   (110,703)   $     (28,031)
                                                  ===============  ============    ============= 
Adjusted pro forma net loss per share ......       $           --  $     (10.03)   $       (2.68)
                                                  ===============  ============    ============= 
</TABLE>

     401(k) Profit Sharing Plan -- In September  1996,  Orion amended the 401(k)
profit  sharing  plan.  Under  this  plan,  100,000  shares of common  stock are
reserved  for  issuance  as  the  Company's   discretionary  match  of  employee
contributions.  The Company's matching  contributions may be made in either cash
or in the equivalent  amount of the Company's  common stock. For the four months
ended  April 30,  1998 and the year  ended  December  31,  1997,  the  Company's
matching  contribution was 3,341 and 10,480 shares of the Company's common stock
with a value of approximately $60,000 and $180,000, respectively.

     Effective May 1, 1998,  the 401(k) Profit  Sharing Plan was merged into the
Loral Space and  Communications,  Ltd. Savings Plan and $0.8 million of matching
contributions  were  incurred  in this plan for the period  May 1, 1998  through
December 31, 1998.

     Stock Purchase Plan -- In September  1996,  Orion adopted an employee stock
purchase plan. Under this plan,  500,000 shares of common stock are reserved for
issuance.  Shares of common stock were purchased under this plan through payroll
deduction.  The purchase price of each share of common stock purchased under the
plan  was 85  percent  of the  fair  market  value  of the  common  stock on the
measurement  date.  During  1998 and 1997 the Company  issued  20,180 and 27,731
shares,  respectively,  pursuant to the Plan.  In March 1998 the Stock  Purchase
Plan was terminated.

     Stock Warrants - In November 1996,  Orion granted 50,000  warrants to DACOM
to  purchase  shares  of  common  stock  at $14  per  share.  The  warrants  are
exercisable for a six month period  beginning six months after the  commencement
date, as defined in the Joint  Investment  Agreement,  and ending one year after
the  commencement  date and will terminate at that time or at any time the Joint
Investment  Agreement is terminated.  The fair value of the warrants at the date
of issue was $300,000 and was estimated using a Black Scholes valuation model.

     Warrants outstanding at:

<TABLE>
<CAPTION>
                                                         PREDECESSOR COMPANY
                                          ---------------------------------------------------
                                             MARCH 31,       DECEMBER 31,     DECEMBER 31,
                                               1998              1997             1996
                                          ---------------   --------------   -----------------
<S>                                       <C>               <C>              <C>           
Range of exercise price.............       $0.01 - $14.00   $0.01 - $14.00   $9.79 - $14.00
                                          ===============   ==============   ============== 

Outstanding at beginning of year....             740,550          142,115           553,768
Granted during year.................                  --          697,400            50,000
Exercised  .........................              (2,518)         (96,159)               --
Canceled   .........................                  --           (2,806)         (461,653)
Converted to warrants to acquire
  Loral common stock ...............            (738,032)              --                --
                                          --------------    -------------    --------------
Outstanding at end of year..........                  --          740,550           142,115
                                          ==============    =============    ==============
</TABLE>

     There were 690,550 and 92,115 warrants exercisable at December 31, 1997 and
1996, respectively.

                                       43

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

6.  REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED)

     The holders of  preferred  stock also hold  warrants to purchase  1,017,509
shares of common stock at the conversion  price of such preferred  stock.  These
warrants  do  not  become  exercisable  unless  Orion  exercises  its  right  to
repurchase the preferred stock at the liquidation value, plus accrued and unpaid
dividends.  As of March 31, 1998,  these  warrants were forfeited as a result of
the conversion of all preferred stock to common stock.

     In January  1997,  the  Company  issued  Senior  Note  Warrants  and Senior
Discount  Note Warrants to acquire  376,608 and 320,792  shares of common stock,
respectively  at $.01 per  share in  connection  with  the  Bond  Offering.  The
warrants were not exercisable  prior to six months after the closing date of the
Bond Offering and became separately  transferable from the Notes six months from
date of issuance.  The  estimated  fair value of the warrants  aggregating  $9.6
million was  allocated  $5.2  million to Senior Notes and $4.4 million to Senior
Discount  Notes as debt  discount.  At December 31, 1997,  6,850  warrants  were
converted  into 5,797 shares of common stock.  In March 1998,  the warrants were
converted to warrants to purchase Loral common stock.

     Shares  Reserved  for  Issuance - The Company  had 0 shares and  14,036,809
shares of common stock at December 31, 1998 and 1997, respectively, reserved for
issuance  upon  conversion  of  debentures  and  preferred  stock,  exercise  of
outstanding stock options and warrants,  and common stock issued under the stock
purchase and 401(k) profit sharing plans.

     Loral's  1996  Stock  Option  Plan  -  Certain  employees  of  Loral  Orion
participate  in Loral's  1996 Stock Option  Plan.  Under this plan,  options are
granted at the  discretion  of Loral's  Board of Directors to employees of Loral
and its affiliates.  Such options become exercisable as determined by the Board,
generally over five years,  and generally  expire no more than 10 years from the
date of grant.  For the nine months  ended  December  31,  1998,  Loral  granted
certain key employees of Loral Orion options to purchase  shares of Loral common
stock at a weighted  average  price of $24.55 per share  (weighted  average fair
value of $5.88 per share). No options were exercised,  and at December 31, 1998,
options  to  purchase  513,420  shares  were  outstanding,  1,200 of which  were
exercisable.

     As described above,  Loral Orion accounts for its stock-based  awards using
the  intrinsic  value method in  accordance  with  Accounting  Principles  Board
Opinion  No. 25,  "Accounting  for Stock  Issued to  Employees"  and its related
interpretations.   SFAS  No.  123,  "Accounting  for  Stock-Based  Compensation"
requires the disclosure of pro forma net income (loss).  Loral Orion adopted the
fair value method.  SFAS No. 123 requires that equity instruments  granted to an
employee by a principal  stockholder be included as part of the disclosure.  The
pro forma incremental effect on net loss required to be disclosed under SFAS No.
123 is approximately $1.9 million for the nine months ended December 31, 1998.

7.  FAIR VALUES OF FINANCIAL INSTRUMENTS

     Other than  amounts due under the Senior Notes and Senior  Discount  Notes,
Orion  believes  that the carrying  amount  reported in the balance sheet of its
other financial assets and liabilities approximates their fair value at December
31, 1998. The fair value of the Company's Senior Notes and Senior Discount Notes
was estimated  based on quoted market prices,  at December 31, 1998 and 1997, to
be  approximately  $438.6  million and $304.9  million,  and $511.8  million and
$377.5 million, respectively.

                                       44

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


8.  SEGMENTS

     The Company has two reportable business segments:  Fixed Satellite Services
and Data Services (see Note 1).

     In evaluating financial performance,  management uses revenues and earnings
before  interest,  taxes and  depreciation  and  amortization  ("EBITDA") as the
measure of a segment's profit or loss. The accounting policies of the reportable
segments are the same as those described in Note 2.

     Summarized financial  information  concerning the reportable segments is as
follows:


                       NINE MONTHS ENDED DECEMBER 31, 1998
                               SEGMENT INFORMATION
                                  (IN MILLIONS)

                                                                 
<TABLE>
<CAPTION>
                                                 FIXED                                TOTAL                      
                                               SATELLITE            DATA           REPORTABLE                    
                                                SERVICES          SERVICES          SEGMENTS         CONSOLIDATED
                                             ---------------   ---------------   --------------      -------------
                                                                                                                 
<S>                                          <C>               <C>               <C>                 <C>          
Revenue from external customers ......       $          25.2   $          39.4   $         64.6      $        64.6
                                             ===============   ===============   ==============      =============
EBITDA (1)............................       $          21.2   $         (13.2)  $          8.0      $         8.0
Depreciation and amortization ........                  41.6               9.8             51.4               51.4
Merger costs .........................                   --                --                --                 .6
                                             ---------------   ---------------   --------------      -------------
Income (loss) from operations ........       $         (20.4)  $         (23.0)  $        (43.4)     $       (44.0)
                                             ===============   ===============   ==============      =============
Capital expenditures .................       $         272.1   $          12.0   $        284.1      $       284.1
                                             ===============   ===============   ==============      =============
Total assets .........................       $       1,355.4   $          56.3   $      1,411.7      $     1,417.5
                                             ===============   ===============   ==============      =============
</TABLE>



                        THREE MONTHS ENDED MARCH 31, 1998
                               SEGMENT INFORMATION
                               PREDECESSOR COMPANY
                                  (IN MILLIONS)

<TABLE>
<CAPTION>
                                                 FIXED                                TOTAL
                                               SATELLITE           DATA           REPORTABLE
                                                SERVICES          SERVICES          SEGMENTS         CONSOLIDATED
                                             ---------------   ---------------   --------------      -------------
<S>                                          <C>               <C>               <C>                 <C>          
Revenue from external customers ......       $           7.9   $          10.9   $         18.8      $        18.8
                                             ===============   ===============   ==============      =============
EBITDA (1)............................       $           6.7   $          (5.7)  $          1.0      $         1.0
Depreciation and amortization ........                   9.6               2.9             12.5               12.5
Merger costs .........................                   --                --                --               12.2
                                             ---------------   ---------------   --------------      ------------- 
Income (loss) from operations.........       $         (2.9)   $          (8.6)  $        (11.5)     $       (23.7)
                                             ===============   ===============   ==============      =============
Capital expenditures .................       $         14.8    $           3.6   $         18.4      $        18.4
                                             ===============   ===============   ==============      =============
Total assets .........................       $      1,381.8    $          49.4   $      1,431.2      $     1,431.2
                                             ===============   ===============   ==============      =============
</TABLE>


     With the  exception  of the  Company's  satellite in orbit,  the  Company's
long-lived assets are primarily located in the United States,  Germany and other
foreign  countries,  and at December 31, 1998,  amounted to approximately,  $979
million, $6 million and $13 million, respectively.

                                       45

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


8.  SEGMENTS - (CONTINUED)

                                                       1997
                                                SEGMENT INFORMATION
                                                PREDECESSOR COMPANY
                                                   (in millions)
<TABLE>
<CAPTION>
                                                 FIXED                                TOTAL
                                               SATELLITE           DATA           REPORTABLE
                                                SERVICES          SERVICES          SEGMENTS         CONSOLIDATED
                                             ---------------   ---------------   --------------      -------------
<S>                                          <C>               <C>               <C>                 <C>          

Revenue from external customers ......       $          31.3   $          41.4   $         72.7      $        72.7
                                             ===============   ===============   ==============      =============
EBITDA (1)............................                  21.3             (16.2)             5.1                5.1
Depreciation and amortization ........                  34.1              14.1             48.2               48.2
                                             ---------------   ---------------   --------------      -------------
Income (loss) from operations.........       $         (12.8)  $         (30.3)  $        (43.1)     $       (43.1)
                                             ===============   ===============   ==============      =============
Capital expenditures .................       $         102.3   $          11.0   $        113.3      $       113.3
                                             ===============   ===============   ==============      =============
Total assets .........................       $         849.0   $          47.5   $        896.5      $       896.5
                                             ===============   ===============   ==============      =============
</TABLE>
<TABLE>
<CAPTION>
                                                       1996
                                                SEGMENT INFORMATION
                                                PREDECESSOR COMPANY
                                                   (IN MILLIONS)
                                                 FIXED                                TOTAL
                                               SATELLITE           DATA           REPORTABLE
                                                SERVICES          SERVICES          SEGMENTS         CONSOLIDATED
                                             ---------------   ---------------   --------------      -------------
<S>                                          <C>               <C>               <C>                 <C>          
Revenue from external customers ......       $          24.9   $          17.0   $         41.9      $        41.9
                                             ===============   ===============   ==============      =============
EBITDA 1..............................                  13.4             (12.8)             0.6                0.6
Depreciation and amortization ........                  30.3               6.6             36.9               36.9
                                             ---------------   ---------------   --------------      -------------
Income (loss) from operations ........       $         (16.9)  $         (19.4)  $        (36.3)     $       (36.3)
                                             ===============   ===============   ==============      =============
Capital expenditures .................       $           3.8   $          12.6   $         16.4      $        16.4
                                             ===============   ===============   ==============      =============
Total assets .........................       $         327.8   $          30.5   $        358.3      $       358.3
                                             ===============   ===============   ==============      =============
</TABLE>
---------------------------- 
(1) EBITDA (which is equivalent to operating  income (loss) before  depreciation
and  amortization and merger costs) is provided because it is a measure commonly
used  in the  communication  industry  to  analyze  companies  on the  basis  of
operating  performance,  leverage and  liquidity and is presented to enhance the
understanding of Loral Orion's operating results.  However, EBITDA should not be
construed  as an  alternative  to net  income  as an  indicator  of a  company's
operating performance,  or cash flow from operations as a measure of a company's
liquidity.  EBITDA may be  calculated  differently  and,  therefore,  may not be
comparable to similarly titled measures reported by other companies.


                                       46

<PAGE>



                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

9.  CONDENSED FINANCIAL INFORMATION OF LORAL ORION, INC.

     Presented below are condensed  balance sheets of Loral Orion,  Inc. (parent
company only basis) at December 31, 1998 and 1997.  All material  contingencies,
obligations and guarantees of Loral Orion,  Inc. have been separately  disclosed
in the preceding notes to the financial statements.





                  CONDENSED BALANCE SHEETS OF LORAL ORION, INC.
                           (PARENT COMPANY ONLY BASIS)

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                  ----------------------------------
                                                                                            1997
                                                                                        PREDECESSOR
                                                                      1998                COMPANY
                                                                  --------------     ---------------
<S>                                                               <C>                 <C>           
ASSETS                                                            
Current assets:                                                   
  Restricted assets .....................................         $      50,180       $       50,064
  Receivable from subsidiaries ..........................               489,384                   --
                                                                  -------------       --------------
       Total current assets..............................               539,564               50,064
Restricted and segregated assets ........................                22,675              284,433
Investment in and advances to subsidiaries ..............               591,421              460,572
Deferred income taxes ...................................                53,915                   --
Due from Loral ..........................................                 3,619                   --
Costs in excess of net asset acquired associated
  with the Loral merger, net ............................
Other assets, net .......................................                15,261               42,021
                                                                  -------------       --------------
       Total assets......................................         $   1,834,470        $     837,090
                                                                  =============       ==============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Payables to subsidiaries ..............................         $     490,984        $          --
  Accrued liabilities ...................................                 5,166                   --
  Other current liabilities .............................                    --                   --
  Interest payable senior notes and debentures ..........                22,842               24,768
                                                                  -------------       --------------
       Total current liabilities.........................               518,992               24,768
Long term debt ..........................................               916,387              782,437
Redeemable preferred stock...............................                    --               76,734
Stockholders' equity (deficit)...........................               399,091              (46,849)
                                                                  -------------       --------------
       Total liabilities and stockholders' equity (deficit)       $   1,834,470        $     837,090
                                                                  =============       ==============
</TABLE>


                                       47
<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     9.  CONDENSED FINANCIAL INFORMATION OF LORAL ORION, INC. - (CONTINUED)



<TABLE>
<CAPTION>
                              CONDENSED STATEMENTS OF OPERATIONS OF LORAL ORION, INC.
                                            (PARENT COMPANY ONLY BASIS)

                                                                                                 PREDECESSOR COMPANY
                                                                               ----------------------------------------------------
                                                         NINE MONTHS           THREE MONTHS           YEARS ENDED DECEMBER 31,
                                                            ENDED                 ENDED
                                                         DECEMBER 31,           MARCH 31,                       
                                                             1998                  1998              1997            1996
                                                       ----------------      ----------------  ---------------- --------------------

<S>                                                     <C>                   <C>              <C>              <C>           
Services revenue  ...................................   $           --        $           --   $           --   $           34
Operating expenses and other income:
   General and administrative .......................               40                    --            2,170            3,832
   Interest expense (income), net....................           54,644                18,285           57,069           (1,884)
   Depreciation and amortization ....................           14,375                    --               --               --
   Other (income), net ..............................             (274)                   --               --               --
   Merger costs   ...................................               --                12,145               --               --
                                                       ----------------      ----------------  ---------------- ---------------
   Total operating expenses and other income.........           68,785                30,430           59,239            1,948
Equity in net losses of subsidiaries ................           12,289                 9,261           46,501           25,281
Income tax benefit ..................................           (1,105)                   --               --               --
                                                       ----------------      ----------------  ---------------- ---------------
Net loss ............................................          (79,969)              (39,691)        (105,740)         (27,195)
Preferred dividends .................................               --                (1,387)              --               --
                                                       ----------------      ----------------  ---------------- ---------------
Net loss attributable to common stockholders .......    $      (79,969)       $      (38,304)  $     (105,740)  $      (27,195)
                                                       ===============       ===============   ================ ===============
</TABLE>

                                       48

<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     9. CONDENSED FINANCIAL INFORMATION OF LORAL ORION, INC. - (CONTINUED)





<TABLE>
<CAPTION>
                              CONDENSED STATEMENTS OF CASH FLOWS OF LORAL ORION, INC.
                                            (PARENT COMPANY ONLY BASIS)

                                                                                            PREDECESSOR COMPANY
                                                                          ------------------------------------------------------
                                                         NINE MONTHS      THREE MONTHS               YEARS ENDED DECEMBER 31,
                                                            ENDED            ENDED
                                                         DECEMBER 31,      MARCH 31,
                                                             1998             1998                  1997                  1996
                                                       ---------------- ----------------      ----------------      ----------------
<S>                                                     <C>              <C>                  <C>                    <C>            
NET CASH PROVIDED BY (USED IN) OPERATIONS............   $      (24,320)  $      (37,300)      $       (22,806)       $       (4,047)

INVESTING ACTIVITIES:
  Advances to subsidiaries...........................         (247,640)            (755)             (407,093)              (15,529)
  Increase in restricted and segregated assets ......               --               --              (406,938)                   --
  Release of restricted and segregated assets .......          273,960           35,938                90,501                    --
  Capital expenditures...............................               --               --                    --                  (504)
                                                       ---------------- ----------------      ----------------      ----------------
  Net cash provided by (used in) investing
     activities......................................           26,320           35,183              (723,530)              (16,033)

FINANCING ACTIVITIES:
  Proceeds from issuance of debt, net ...............               --               --               744,275                    --
  Proceeds from issuance of redeemable
    preferred stock..................................               --               --                 2,152                    --
  Proceeds from issuance of common stock.............               --            2,117                    --                   343
  Purchase of treasury stock ........................               --               --                   (91)                   --
  Repayment of senior notes payable..................           (2,000)              --                    --                (2,496)
                                                       ---------------- ----------------      ----------------      ----------------
  Net cash provided by (used in) financing
    activities ......................................           (2,000)           2,117               746,336                (2,153)
                                                       ---------------- ----------------      ----------------      ----------------
  Net (decrease) increase in cash and cash
    equivalents......................................               --               --                    --               (22,233)
Cash and cash equivalents at beginning of year.......               --               --                    --                48,798
                                                       ---------------- ----------------      ----------------      ----------------
Cash and cash equivalents at end of year.............   $           --   $           --       $            --        $       26,565
                                                       ================ ================      ================      ================
</TABLE>

     Basis of presentation -- In these parent  company-only  condensed financial
statements,  Orion's investment in subsidiaries is stated at cost less equity in
the losses of subsidiaries since date of inception or acquisition.

     Loral  Orion , Inc.  ("Loral  Orion"),  a  Delaware  company,  is a holding
company  which is the  ultimate  parent of all  Loral  Orion  subsidiaries.  The
accompanying  financial  statements reflect the financial  position,  results of
operations  and cash  flows of Loral  Orion on a  separate  company  basis.  All
subsidiaries of Loral Orion are reflected as investments accounted for under the
equity method of accounting.  Accordingly  intercompany payables and receivables
have not been eliminated.

     Loral Orion's significant transactions with its subsidiaries other than the
investment account and related equity in net loss of unconsolidated subsidiaries
are intercompany  payables and receivables  resulting primarily from the funding
of operations and the construction of Loral Orion satellites.

     No cash dividends  were paid to Loral Orion by its  affiliates  during nine
months ended  December  31, 1998,  the three months ended March 31, 1998 and the
years ended December 31, 1997 and 1996.

                                       49
<PAGE>


                                LORAL ORION, INC.
     (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

10.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following is a summary of the quarterly  results of operations  for the
years ended December 31, 1998 and 1997 (in thousands):



<TABLE>
<CAPTION>
                                                     PREDECESSOR
                                                       COMPANY
                                                      MARCH 31,             JUNE 30,            SEPTEMBER 30,    DECEMBER 31,
                                                      ---------             --------            -------------    ------------
<S>                                                <C>                   <C>                   <C>               <C>            
1998
  Revenues...................................      $        18,790       $        20,243       $        21,153   $        23,212
  Loss from operations.......................              (23,639)              (15,296)              (13,951)          (14,782)
  Loss before income taxes, extraordinary loss
     on extinguishment of debt, minority
     interest and preacquisition loss of                   (39,691)              (28,000)              (26,301)          (26,701)
     acquired subsidiary.....................
  Net loss ..................................              (39,691)              (19,755)              (29,614)          (30,600)
<CAPTION>

                                                                                  PREDECESSOR COMPANY
                                                      -----------------------------------------------------------------------------
                                                      MARCH 31,             JUNE 30,            SEPTEMBER 30,    DECEMBER 31,
                                                      ---------             --------            -------------    ------------

1997
<S>                                                <C>                   <C>                   <C>               <C>            
  Revenues...................................      $        20,233       $        16,687       $        17,619   $        18,202
  Loss from operations.......................               (8,317)              (10,915)              (11,270)          (12,579)
  Loss before income taxes, extraordinary loss
     on extinguishment of debt, minority
     interest and preacquisition loss of                   (22,889)              (24,745)              (27,510)          (27,501)
     acquired subsidiary.....................
  Net loss...................................              (25,984)              (24,745)              (27,510)          (27,501)
</TABLE>


                                       50


<PAGE>



     ITEM 9. CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURES.

     As a result of the Merger,  the Board of Directors of the Company appointed
Deloitte & Touche LLP ("Deloitte & Touche") as independent  auditors,  effective
May 13, 1998.  Deloitte & Touche  replaced  Ernst & Young LLP ("Ernst & Young"),
which served as the  Company's  independent  auditors for the fiscal years ended
December  31, 1997 and December 31, 1996 and was  dismissed,  effective  May 13,
1998.

     The reports issued by Ernst & Young on the Company's  financial  statements
for the fiscal  years  ended  December  31, 1997 and  December  31, 1996 did not
contain any adverse opinion or disclaimer of opinion,  and were not qualified or
modified as to uncertainty, audit scope or accounting principles.

      During the fiscal years ended December 31, 1997 and December 31, 1996, and
during  the  interim   period   preceding  May  13,  1998,  (i)  there  were  no
disagreements  with  Ernst & Young on any  matter of  accounting  principles  or
practices,  financial statement  disclosure,  or auditing scope or procedure and
which, if not resolved to the  satisfaction of Ernst & Young,  would have caused
Ernst & Young to make  reference to these matters in their report and (ii) there
were no "reportable  events" (as that term is described in Item  304(a)(i)(v) of
Regulation S-K).


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     Omitted pursuant to General Instruction I of Form 10-K.

ITEM  11.     EXECUTIVE COMPENSATION.

     Omitted pursuant to General Instruction I of Form 10-K.

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     Omitted pursuant to General Instruction I of Form 10-K.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Omitted pursuant to General Instruction I of Form 10-K.


                                     PART IV

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

     (a)  (1) and (2)  List of  Financial  Statements  and  Financial  Statement
          Schedules

     The following  consolidated  financial  statements of Loral Orion, Inc. are
included in Item 8:

          Consolidated  Balance Sheets - December 31, 1998 and 1997 (Predecessor
          Company)

          Consolidated Statements of Operations - Nine months ended December 31,
          1998, and for the Predecessor Company the three months ended March 31,
          1998, and the years ended December 31, 1997 and 1996

          Consolidated Statements of Changes in Stockholders' Equity (Deficit) -
          Nine months ended December 31, 1998, and for the  Predecessor  Company
          the three months ended March 31,  1998,  and the years ended  December
          31, 1997 and 1996

          Consolidated Statements of Cash Flows - Nine months ended December 31,
          1998, and for the Predecessor Company the three months ended March 31,
          1998, and the years ended December 31, 1997 and 1996

          Notes to Consolidated Financial Statements

                                       51

<PAGE>



     All  schedules  for which  provision is made in the  applicable  accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted, except
for Schedule I, condensed financial  information which is presented in Note 9 in
the Company's consolidated financial statements.


         (b) Reports on Form 8-K filed in the fourth quarter of 1998:

             None.

         (c) Exhibits




EXHIBIT
NUMBER                                         EXHIBIT DESCRIPTION
------                                         -------------------

2.1               Agreement and Plan of Merger,  dated as of October 7, 1997, by
                  and  among  Orion,  Loral  and  Loral  Satellite  Corporation.
                  (Incorporated  by reference  to exhibit  number 2.1 in Current
                  Report on Form 8-K dated October 9, 1997).

2.2               Principal  Stockholder  Agreement  among Orion,  Loral,  Loral
                  Satellite   Corporation   and  the   stockholders   that   are
                  signatories   thereto,   dated   as  of   October   7,   1997.
                  (Incorporated  by reference  to exhibit  number 2.2 in Current
                  Report on Form 8-K dated October 9, 1997).

2.3               Amendment  No. 1  Agreement  and Plan of  Merger,  dated as of
                  February  11,  1998,  by and  among  Orion,  Loral  and  Loral
                  Satellite  Corporation.  (Incorporated by reference to exhibit
                  number 2.2 in  Registration  Statement  No.  333-46407 on Form
                  S-4).

2.4               Amendment  No.  1 to  Principal  Stockholder  Agreement  among
                  Orion, Loral, Loral Satellite Corporation and the stockholders
                  that are  signatories  thereto,  dated as of December 1, 1997.
                  (Incorporated  by  reference  to Exhibit  number 2.4 in Annual
                  Report on Form 10-K for fiscal year ended December 31, 1997).

3.1               Certificate  of Merger  of Loral  Satellite  Corporation  into
                  Orion dated  March 20,  1998 and  Exhibit A thereto,  Restated
                  Certificate of Incorporation of the Company.*

3.2               Certificate of Amendment to Certificate  of  Incorporation  of
                  the Company.*

3.3               Amended and Restated Bylaws of the Company.*

4.1               Form of  Senior  Note  Indenture  and  Form  of Note  included
                  therein.  (Incorporated  by reference to Exhibit number 4.1 to
                  Registration Statement No. 333-19167 on Form S-1).

4.2               Form  of  Senior  Discount  Note  Indenture  and  Form of Note
                  included therein. (Incorporated by reference to Exhibit number
                  4.2 to Registration Statement No. 333-19167 on Form S-1).

4.3               Form   of   Collateral   Pledge   and   Security    Agreement.
                  (Incorporated   by   reference   to  Exhibit   number  4.3  to
                  Registration Statement No. 333-19167 on Form S-1).

10.1              Second  Amended  and  Restated   Purchase   Agreement,   dated
                  September 26, 1991 ("Satellite Contract") by and between Loral
                  Orion  Services,  Inc.  (formerly  known  as  Orion  Satellite
                  Corporation)   and  British   Aerospace   PLC  and  the  First
                  Amendment,  dated as of September 15, 1992,  Second Amendment,
                  dated as of November  9, 1992,  Third  Amendment,  dated as of
                  March 12, 1993, Fourth Amendment,  dated as of April 15, 1993,
                  Fifth  Amendment,  dated  as  of  September  22,  1993,  Sixth
                  Amendment, dated as of April 6, 1994, Seventh Amendment, dated
                  as of August 9, 1994, Eighth  Amendment,  dated as of December
                  8, 1994, and Amendment No. 9 dated October 24, 1995,  thereto.
                  [CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THESE
                  DOCUMENTS.]  (Incorporated  by  reference  to exhibits  number
                  10.13 and 10.14 in Registration Statement No. 33-80518 on Form
                  S-1).


                                       52

<PAGE>

EXHIBIT
NUMBER                                         EXHIBIT DESCRIPTION
------                                         -------------------


10.2              Restated  Amendment  No. 10 dated  December 10, 1996,  between
                  LOSI  and  Matra  Marconi  Space  to the  Second  Amended  and
                  Restated Purchase  Agreement,  dated September 16, 1991 by and
                  between  OrionServ and British  Aerospace PLC (which  contract
                  and prior exhibits  thereto were  incorporated by reference as
                  exhibit  number 10.1).  (Incorporated  by reference to exhibit
                  number 10.2 in  Registration  Statement No.  333-19795 on Form
                  S-4).

10.3              Contract for a Satellite  Control  System,  dated  December 7,
                  1992, by and between Loral Orion  Services,  Inc.,  Telespazio
                  S.p.A.   and  Martin   Marietta   Corporation.   [CONFIDENTIAL
                  TREATMENT  HAS BEEN  GRANTED FOR  PORTIONS OF THIS  DOCUMENT.]
                  (Incorporated   by  reference  to  exhibit   number  10.31  in
                  Registration Statement No. 33-80518 on Form S-1).

10.4              Credit  Agreement,  dated  as of  November  23,  1993,  by and
                  between Loral Orion  Services,  Inc. (as successor in interest
                  to  Orion  Atlantic,   L.P.)  and  General   Electric  Capital
                  Corporation (`GECC'). [CONFIDENTIAL TREATMENT HAS BEEN GRANTED
                  FOR PORTIONS OF THIS DOCUMENT.]  (Incorporated by reference to
                  exhibit number 10.32 in Registration Statement No. 33-80518 on
                  Form S-1).

10.5              Security  Agreement,  dated as of November  23,  1993,  by and
                  between Loral Orion Services, Inc. and GECC.  (Incorporated by
                  reference to exhibit  number 10.33 in  Registration  Statement
                  No. 33-80518 on Form S-1).

10.6              Assignment  and Security  Agreement,  dated as of November 23,
                  1993,  by and between  Loral Orion  Services,  Inc.  and GECC.
                  (Incorporated   by  reference  to  exhibit   number  10.34  in
                  Registration Statement No.
                  33-80518 on Form S-1).

10.7              Consent and  Agreement,  dated as of November 23, 1993, by and
                  between   Loral  Orion   Services,   Inc.,   Martin   Marietta
                  Corporation  and GECC.  (Incorporated  by reference to exhibit
                  number 10.35 in  Registration  Statement No.  33-80518 on Form
                  S-1).

10.8              Deed of Trust,  dated as of November 23, 1993,  by and between
                  Loral Orion Services,  Inc., W. Allen Ames, Jr. and Michael J.
                  Schwel, as Trustees,  and GECC.  (Incorporated by reference to
                  exhibit number 10.37 in Registration Statement No. 33-80518 on
                  Form S-1).

10.9              Lease Agreement, dated as of November 23, 1993, by and between
                  OrionNet, Inc. and Loral Orion Services, Inc. (as successor in
                  interest to Orion Atlantic, L.P.), as amended by an Amendment,
                  dated  January  3,  1995.  [CONFIDENTIAL  TREATMENT  HAS  BEEN
                  GRANTED FOR  PORTIONS  OF THESE  DOCUMENTS.  (Incorporated  by
                  reference to exhibit  number 10.38 in  Registration  Statement
                  No. 33-80518 on Form S-1).

10.10             Note for Interim Loans,  dated as of November 23, 1993, by and
                  between Loral Orion  Services,  Inc. (as successor in interest
                  to Orion Atlantic,  L.P.) and GECC. (Incorporated by reference
                  to exhibit number 10.42 in Registration Statement No. 33-80518
                  on Form S-1).

10.11             Lease  Agreement,  dated as of October 2, 1992, by and between
                  OrionNet  and  Research  Grove   Associates,   as  amended  by
                  Amendment  No. 1 dated March 26, 1993.  Amendment  No. 2 dated
                  August 23, 1993,  and Amendment No. 3 dated December 20, 1993.
                  (Incorporated   by  reference  to  exhibit   number  10.39  in
                  Registration Statement No. 33-80518 on Form S-1).

10.12             Restated Definitive Agreement,  dated October 29, 1998, by and
                  between   Orion  and   Republic  of  the   Marshall   Islands.
                  [CONFIDENTIAL  TREATMENT  HAS BEEN  REQUESTED  FOR PORTIONS OF
                  THIS DOCUMENT.]*

10.13             TT&C Earth Station  Agreement,  dated as of November 11, 1996,
                  by and between Loral Orion Services,  Inc. (by assignment from
                  Loral Orion-Asia  Pacific,  Inc., formerly known as Orion Asia
                  Pacific  Corporation and DACOM Corp.  [CONFIDENTIAL  TREATMENT
                  HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated
                  by reference to exhibit number 10.39 in Registration Statement
                  No. 333-19795 on Form S-4).

                                       53

<PAGE>




EXHIBIT
NUMBER                                      EXHIBIT DESCRIPTION
------                                      -------------------

10.14             Joint Investment Agreement,  dated as of November 11, 1996, by
                  and between Loral Orion  Services,  Inc. (by  assignment  from
                  Loral Orion-Asia  Pacific,  Inc., formerly known as Orion Asia
                  Pacific Corporation) and DACOM Corp.  [CONFIDENTIAL  TREATMENT
                  HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated
                  by reference to exhibit number 10.40 in Registration Statement
                  No. 333-19795 on Form S-4).

10.15             Orion 3 Spacecraft Purchase Contract,  dated January 15, 1997,
                  by and among  Hughes Space and  Communications  International,
                  Inc.,  Loral Orion  Services,  Inc. (by assignment  from Loral
                  Orion-Asia  Pacific,   Inc.,  formerly  known  as  Orion  Asia
                  Pacific,  Inc.) and Orion.  [CONFIDENTIAL  TREATMENT  HAS BEEN
                  GRANTED FOR  PORTIONS  OF THIS  DOCUMENT.].  (Incorporated  by
                  reference to Exhibit  number 10.52 to  Registration  Statement
                  No. 333-19167 on Form S-1).

10.16             Letter  Agreement,  effective  as of May 20/21,  1997,  by and
                  between  Orion  and  Morgan  Stanley  & Co.  (Incorporated  by
                  reference  to Exhibit  number  10.53 to Annual  Report on Form
                  10-K for the fiscal year ended December 31, 1997).

10.17             Orion-Z Spacecraft  Purchase Contract,  dated May 15, 1998, by
                  and   between   Loral   Orion   Services,   Inc.   and   Space
                  Systems/Loral,  Inc. and  Amendment  No. 1 dated  December 29,
                  1998.  [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS
                  OF THIS DOCUMENT.]*

10.18             Agreement,  dated  January 1, 1999, by and between Loral Orion
                  Services, Inc. and Loral Skynet.*

10.19             Agreement,  dated  January 1, 1999, by and between Loral Orion
                  Services, Inc. and Loral Skynet.*

23                None

27                Financial Data Schedule.*


* Filed herewith.

          (d)     Financial statement schedule

                  Schedule I, see Note 9 in the Company's Consolidated Financial
                  Statements


                                       54

<PAGE>




                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                LORAL ORION, INC.

                             /s/ Benard L. Schwartz
                             By: Bernard L. Schwartz
                           (Chairman of the Board and
                            Chief Executive Officer)

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed by the following  persons on behalf of the Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                               Title                                   Date
---------                               -----                                   ----

<S>                                 <C>                                         <C> 
/s/ Bernard L. Schwartz             Chairman of the Board                       March 30, 1999
---------------------------         and Chief Executive Officer
Bernard L. Schwartz                 

/s/ George Baker                    Director                                    March 30, 1999
---------------------------
George Baker

/s/ Gregory J. Clark                Chief Operating Officer and                 March 30, 1999
---------------------------         Director
Gregory J. Clark                    

/s/ Michael P. DeBlasio             First Senior Vice President                 March 30, 1999
---------------------------         and Director
Michael P. DeBlasio                 

/s/ Daniel Hirsch                   Director                                    March 30, 1999
---------------------------
Daniel Hirsch

/s/ Eric J. Zahler                  Senior Vice President                       March 30, 1999
----------------------------        Secretary and Director
Eric J. Zahler

/s/ Richard J. Townsend             Senior Vice President                       March 30, 1999
----------------------------        and Chief Financial Officer
Richard J. Townsend                (Principal Financial Officer)

/s/ Harvey B. Rein                  Vice President and                          March 30, 1999
----------------------------        Controller
Harvey B. Rein                     (Principal Accounting Officer)
</TABLE>


                                       55